Dollar dented by Trump's Fed comments

Posted August 22, 2018

The rand firmed more than 1% in early trade on Tuesday, matching gains by its emerging market peers as criticism of Federal Reserve rate hikes by US President Donald Trump hurt the dollar and revived demand for some risk assets.

Only once short-term rates reach a "neutral" level where they are neither stimulating nor braking the economy should the central bank potentially stop raising rates and figure out what to do next, Dallas Fed President Robert Kaplan said in an essay.

This isn't the first time Trump has taken exception to the Fed's gradual interest-rate hikes.

Trump has departed from this past practice and said he would not shy from future criticism should the Fed keep lifting rates.

In developed economies, central banks are independent of political control.

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Most analysts think that Trump's criticism will have little effect on the Fed's rate-hike plans, given the USA central bank's legal independence. Powell, a Republican, has repeatedly said that he believes in the Fed's independence and that he and his colleagues that set interest rates will not bow to outside pressure.

Kaplan's comments, though they did not directly address Trump's remarks, underscore the Fed's view that raising rates, as Kaplan put it, "will give us the best chance of managing against imbalances and further extending the current economic expansion in the U.S". Against the Swiss franc CHF=, the dollar weakened to its lowest since July 9, last at 0.987.

The Federal Reserve last raised interest rates in June, when it signaled that it could raise them two more times this year.

"Am I happy with my choice?" Trump followed up those comments with further complaints on Twitter.

Trump claimed during his speech that Powell is a fan of "cheap money" yet continues to raise rates.

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In addition to picking Powell as Fed chair, Trump has appointed one other board member, Randal Quarles, and has nominated three others to the panel, two of whom are expected to be confirmed soon by the Senate.

Asked on Monday if he believed in the Fed's independence, Trump said: "I believe in the Fed doing what's good for the country". The word "strong" was applied to describe the labor market, the rate of economic growth, and to household spending.

Corker said comments such as these could be damaging, as it could make the Fed appear to be a political symbol for the public and lead people to see the central bank's decisions with a political taint whenever it acts.

"If you look at the transmission from economic growth to earnings growth to shareholder returns, it's strongest in the USA, it's ok in Europe and pretty weak in EM", said Goldman's Kilmurray, who has been underweight emerging markets for five years.

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