The United States and China give a positive assessment of progress in trade negotiations, which helps markets to grow this morning. Nikkei adds about 1% and futures for S&P 500 adds 0.5% this morning after optimistic comments from U.S. and Chinese officials that the parties will be able to resolve their disputes. This is unlikely to mean the total elimination of the barriers created last year but it promises to partially knock them down and, at least, to halt the building up them further.
However, we should not forget that now the both parties are trying hard to solve the man-made problems, which were not existed a year ago. Major politicians do not give in to Trump’s blackmail, but the process itself takes a lot of time, which Trump uses to raise his demands and build up pressure.
A similar situation occurs with the suspension of government funding for the third week in a row. The firm intention to achieve financing for the construction of a wall on the border with Mexico in this way led to excessively negative consequences.
In the end, it hurts markets, and the Fed simply has nothing to do but to change its policy rhetoric. Both disputes (with China and Democrats in Congress) are detrimental to macro-economic prospects. The longer they will last, the worse it for the dollar.
In November, the dollar reached its maximum but in December began to actively form a downtrend following the softening of the Fed's rhetoric. Despite the words about the progress in the negotiations, the markets are cautiously looking to the future, still expecting rates to drop in the new year against the Fed's forecasts for 2 increases, which harms the dollar by reevaluating long-term prospects.
Governmental shutdown has short-term negative impact to the dollar, raising the degree of political uncertainty. Today Trump has planned an appeal to the nation to introduce a state of emergency in the country. This will allow the president to achieve his goal with wall but will not solve the main problem with finding a compromise and increasing the number of supporters of his policy. This situation threatens even greater disputes in the future on other similar issues.
Problems of trade disputes and shutdown can be solved in the coming weeks or even days but very few will vouch that immediately after resolve of the current problems the U.S. won't face new, even more dangerous difficulties that would continue to erode the dollar.