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growth, and, in the event, the 10Y UST yield at 2.34% would not seem too
high.
The dollar will continue to smile. Previously, we made the suggestion that
the US dollar is on the right side of the Dollar Smile against the majors, but
it is on the left side of the Dollar Smile against the EM
currencies. Reaganomics-Lite should be positive for the dollar, even if the
US’ twin deficits could widen. ‘America First’ means that there will be a
bifurcation in economic prosperity, that economic strength in the US will no
longer translate, with the same elasticities as before, into prosperity in many
parts of EM. (1) The dollar has begun a consolidation phase this week. But
my guess is that it will be temporary and shallow, partly because the data
(ISM and NFPRs) will be sufficiently strong to justify another Fed rate hike
on December 14. The weekly claims data remain extraordinarily strong,
while the second derivatives in the data in much of EM have ceased to be
positive. (2) Further advances in the dollar, however, will of course depend
on the policy announcements and delivery by the Trump Administration, as
well as an apparent lack of an economic strategy in other countries. (3)
Yield differentials have helped the dollar advance vis-à-vis the JPY and the
EUR. However, I should note that the EMU economies are not doing that
badly, though credit demand remains weak. PMI remains well above 50 and
inflation has bounced away from zero. The main factor – other than yield
differentials - weighing on the EUR is the risk that we will see more political
uncertainty in Europe. (4) I came across an editorial arguing that Mr
Trump’s protectionist policies would hurt the dollar’s international
standing. While this may be a popular view – that the US, as a savings
deficit nation, needs a globalised world to finance its external balance –I
contest this conclusion. I think it will be extremely difficult for the
international status of the dollar to be supplanted, even with Mr Trump as
the President. The dollar losing its hegemonic status has been a popular
thesis by many academics over the last twenty years – precisely the period
when the dollar’s international and reserve currency status has risen. In
many ways, the sturdiness of the dollar’s global status has surprised some
people, because globalisation is supposed to lead to a multi-polar world
where the US loses its dominance. That is certainly true for the real
economy, but exactly the opposite has happened for the dollar. This is a
point I’ve tried hard to make over the years, that financial globalisation is
uni-polar, even though trade globalisation is multi-polar. Look at how the
rise in the dollar is hurting, disproportionately, the high-yield and EM
currencies. Further, which currencies might replace the dollar? The EUR
itself is still in an existential crisis; nothing needs to be said about the JPY;
China could not even dare opening up its capital account. In fact, Beijing
has just issued even more ‘strict controls’ on overseas investment, after
experiencing some USD207 billion in outflows in Q3 2016. Just because
President Trump’s prospective trade policy may not be politically correct

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