US central bank boss Janet Yellen may be a political neophyte, but she has grasped the importance of not irritating US President Donald Trump by doing anything that could push the US dollar higher.
That's why the US Federal Reserve is now scrupulous to avoid any suggestion that it could surprise investors with an early interest rate hike.
The latest statement from the Federal Open Market Committee assiduously sticks to the well-trodden path: the US economy is growing "at a moderate pace", inflation is picking up "but is still below the committee's 2 per cent longer-run objective", and Fed expects to make "only gradual increases" in US interest rates.
So far, the Fed's increased evasiveness seems to be working. The US dollar, which had risen ahead of the release of the Fed's statement, pared some of its gains as traders fretted that the Fed gave no hint as to future rate hikes.
Of course, Yellen would have to be politically tone-deaf not to have picked up the Trump administration's message that the US is losing the global trade war because other countries are cheating by deliberately driving their currencies lower in order to make their exports more attractive in global markets.
Trump himself lashed out at Japan and China this week, saying that "they play the devaluation market, while we sit here like a bunch of dummies".
Meanwhile, his top trade adviser, Peter Navarro, accused Germany of using a "grossly undervalued" euro to "exploit" the US.
Major hurdle
But the Trump administration faces a major hurdle in its efforts to drive the greenback lower. Global investors are likely to continue to find reasons to send their money to the US, not because the US economic outlook is so enticing, but because the other major options – such as the euro, the yen, the British pound and the Chinese yuan – are so unappealing.
Global investors are unwilling to keep their money in euros because of fears that a populist backlash could sweep anti-European Union politicians into power in the Netherlands, France or Italy, raising the risk of a possible break-up of the eurozone.
The yen is also problematic, now that the Trump administration appears to be targeting Japan over currency manipulation. Japanese Prime Minister Shinzo Abe was quick to refute Trump's charge, saying that "the kind of criticism they are making of yen manipulation is incorrect".
Similarly, the pound is likely to come under pressure as Britain prepares for tough Brexit negotiations, while capital is fleeing China, which is putting downward pressure on the yuan.
Still, Trump is doing his best to dampen investor enthusiasm for the US, with his ban on Muslim immigrants, and threat to slap a 20 per cent tax on imports from Mexico to pay for a wall along the southern US border.
The US dollar, which rallied to a 14-year high after Trump's electoral victory last November has edged lower this year, falling nearly 3 per cent in January.
'Exceptional uncertainty'
In a note to clients this week, billionaire investor Ray Dalio – who runs the Bridgewater Associates, the world's largest hedge fund firm – expresses concern the harmful effects of Trump's populist policies could overpower the benefits of his pro-business policies.
"We are now in a period of time when how this balance tilts will be more important to the economy, markets and our well-beings than normally dominant drivers such as central bank policies" Dalio said in the note, which was co-written with Bridgewater co-chief investment officer, Bob Prince.
Dalio and Price warned current investment environment is one of "exceptional uncertainty".
"While there is a lot of potential to improve fiscal policies and make beneficial structural reforms (to enhance the business friendly environment, reduce regulatory inefficiencies, etc), there is also significant risk that his populist policies could hurt the world economy (and worse)."
The Bridgewater note also says Trump's "America First" policy, his executive order on immigration and his protectionist leanings were reminiscent of the policies of populist governments in the 1930s.
"Nationalism, protectionism and militarism increase global tensions and the risks of conflict. For these reasons, while we remain open-minded, we are increasingly concerned about the emerging policies of the Trump administration," the note says.
