US-Russia tension while euro strengthens

Published 04.08.2017 23:02

I ended my article with this sentence two weeks ago: "If the uncertainty caused by [U.S.] President [Donald] Trump continues at this pace and the Federal Reserve (Fed) does not decide to contract its balance sheet at the September meeting, we should not be surprised to see a move to the 1.16 to 1.20 band for the euro-dollar exchange rate." While you are reading these lines, the U.S. employment statistics for July will be announced. Prior to this data, the statistics revealed by ADP and Moody's Analytics on Aug. 2 showed that private sector employment in the U.S. was below expectations in July with 178,000. It is predicted that nonagricultural employment will increase by 180,000 in July. With the promise that nonagricultural employment statistics will create excitement, the fact that global investors continue to reduce long positions in dollars has uplifted euro-dollar parity to 1.1868 - its highest level since January 2015.

Experts indicate that for now, this movement in euro-dollar parity will be over with sales above 1.187 because of summer vacations in Europe, transaction volume is ranging low. When we look at the graphs, it can be seen that the next resistance point was the high level of Jan. 12, 2015, at 1.1871. The evaluations of Bank of America Merrill Lynch point out that even though there is room for the dollar to rise, with hedge funds back to selling dollars, it will remain low. BOFA's G10 Currencies Strategy Director Athanasios Vamvakidis has stated that many of the bank's clients have sold dollars during most of the year and that the dollar lost the support of corporate investors in July.

On the Fed side, Cleveland Fed Governor Loretta Mester argued that they will closely monitor the inflation data and that markets can absorb it if the Fed gradually shrinks its balance sheet, and emphasized that it might be late to wait until all targets are reached. In other words, she advocated that the balance sheet contraction should begin before inflation reaches 2 percent. She added that the value of the dollar partially shows that trade cooperation such as with the EU is getting better. St. Louis' Fed Governor James Bullard, on the other hand, has stated that the inflation outlook for 2017 is getting worse, thus, in the short term he will not be supporting an interest rate hike as a new hike will obstruct inflation from reaching 2 percent. All these developments suggest that the euro-dollar parity will continue to move at the range of 1.16 to 1.20 until mid-September.

Sanction tensions growing

Trump has made public that he signed U.S. Congress's new sanction bill for Russia, Iran and North Korea for "national unity" even though he called it "seriously flawed." With the bill that became law, Trump's possible actions to lift sanctions on Russia will be subject to approval from Congress. Representative of the Russian Federation to the United Nations, Vassily Alekseevich Nebenzia, expressed that in relation to the new bill from U.S. Congress on new sanctions on Russia that was passed and signed, those who have the bill up are mistaken if they think Russia will alter its policies and should know very well that Russia will not squirm. Nebenzia said Trump had to sign the new bill demanding new sanctions on Russia, and even though it is inevitable that these sanctions hurt relations, Russia will continue to search for ways to collaborate with its partners, including the U.S.

Russian Prime Minister Dmitri Medvedev, on the other hand, said that it is not possible for U.S. relations to recover regarding the new sanctions, and highlighted that the U.S. has launched an exhaustive trade war against Russia. Medvedev said the Trump administration showed great inability and handed over all executive power to Congress, and Russia will succeed in coping with the new sanctions.

European Commission President Jean-Claude Juncker, in turn, emphasized that following Trump's signature of the Bill to Fight America's Enemies with Sanctions, they will defend their economic interests against the U.S. regarding the possibility that companies from EU member countries such as Germany, France, the Netherlands and Austria involved in Russia's natural gas and oil projects might get hurt, and if the regulation is enforced in a way that undermines European interest, the EU is ready to answer to this in an adequate way within days. Things may get even tenser in the U.S.-Russia-EU line.

No more joy in Europe

The 2008 global financial crisis caused 54 percent of U.S. households to fall into a position to not be able to meet a $100 emergency spending. Although nine years have passed since the crisis, still, 46 percent of U.S. households cannot afford $100 for emergency spending. On the European side, Eurostat's latest report shows that 32.9 percent of EU citizens do not have a budget to afford at least one week of vacation outside their country. This ratio is the lowest in Sweden with 8 percent and in Luxembourg with 13 percent, and the highest with 66 percent in Romania and 62 percent in Croatia. This ratio is 53.6 percent in Greece which is still dealing with an economic crisis.

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