The euro jumped to intraday highs Tuesday after a trade adviser to U.S. President Donald Trump called the shared currency 'grossly undervalued'. The euroEURUSD, +0.5330% leapt to $1.0764 after the head of Trump's recently formed National Trade Council, Peter Navarro, told the Financial Times that Germany is using the currency's low valuation to exploit the U.S. and the European Union.
Currency Wars: Trump Vs. The Dollar
As the long-term chart above suggests, dollar's long-term uptrend is very much alive.
Why is that a problem?
"Our companies can’t compete with [Chinese companies] now because our currency is too strong. And it’s killing us," Trump told the Wall Street Journal.
He is most definitely correct, but it is not only the Chinese. It is nearly everyone. The EU and Japan are actively trying to debase their currencies against the dollar. In their final attempts to maintain their economies afloat and growing.
Just a few minutes ago Peter Navarro fired the first shot against the EU and Germany by accusing Germany of using a “grossly undervalued” euro to "exploit the US and its EU partners".
For investors the matter above is incredibly important.
We might be witnessing early stages of an all out currency and trade war. No one benefit when countries shut down in a protectionist mode. It can be argued that 1929 crash was caused by a very similar fundamental backdrop. In terms of protectionism and trade. Is it then a coincidence that today's S&P P/E ratio is sitting near the same record high levels?
At the end of the day we have to watch how DXY trades over the next few weeks/months. If the decline continues or accelerates down, Trump is winning and we might have an all out currency/trade war on our plate. And if the opposite is true, well, Trump promises are failing.
Pick your medicine.