USD: Risk environment softens on trade confrontation – ING

Source Fxstreet

Global equity markets and the dollar start the week a little softer as trade tensions between the US and China start to reappear. It's not quite fair to say that the US-China trade deal reached in Geneva last month is unravelling, but both sides clearly seem frustrated. Social media posts from US President Donald Trump on Friday and comments made in the Chinese state media today both express frustration that trade commitments have not been adhered to. Any early end to the deal, which lasts until 12 August, would hit risk assets and the dollar again, ING's FX analyst Chris Turner notes.

DXY can edge down towards the 98.70 area

"Another, more indirect factor that may be keeping the dollar soft is the threat of a Section 899 'revenge tax', which is currently in President Trump's tax bill working its way through Congress. The idea here is that the US can employ a retaliatory tax of up to 20% on any country's residents employing 'discriminatory' taxes. There is a lot of legalese here in terms of definitions of these taxes, but one of these is the Digital Services Tax, currently employed in much of Europe and places like India and Taiwan, too."

"In theory, if these countries do not remove these discriminatory taxes in time, a new withholding tax on gross income (interest, dividends and royalties) could be applied from the start of next year should the bill go through Congress. The Senate looks at this this week. This all adds to the narrative of the potential divestment of US assets – something we'll be tracking closely as the data emerges."

"In terms of data this week, there's a big focus on jobs (job openings on Tuesday and payrolls Friday), plus business surveys starting with ISM manufacturing today. We'll also have quite a few Federal Reserve speakers and get the Fed's Beige Book on Wednesday. In terms of the latest Fed views, Christopher Waller gave a speech in Asia earlier today, once again as a proponent of rate cuts later this year. In terms of current market pricing, 53bp of Fed rate cuts are expected this year. Even though the speculative market is quite short dollars already, the bearish overhang suggests DXY can edge down towards the 98.70 area, barring a big positive spike in the ISM today."

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