(Bloomberg) -- The dollar could be vulnerable if President Donald Trump comes out swinging on trade and risks another government shutdown in his State of the Union address.
Sentiment on the U.S. currency has been driven in recent months by the trade conflict with China and Trump’s efforts to obtain funding for a wall on the border with Mexico, which prompted the longest U.S. government shutdown in history. If the president chooses to escalate these issues in his speech later Tuesday, the dollar could be set to extend this year’s drop, according to Mizuho Securities Co. and Westpac Banking Corp.
“There’s likely to be a nervous reaction -- weighing on Treasury yields and stocks -- if Trump just complains about Democrats and threatens another shutdown next week if they don’t agree to wall funding,” said Sean Callow, senior currency strategist at Westpac.
The Bloomberg Dollar Spot Index, a gauge of the greenback against its major peers, has fallen around 1 percent this year, as U.S. growth slows and the Federal Reserve has curbed expectations for further interest-rate hikes. Ten-year Treasury yields fell six basis points in January, the third monthly drop and the longest run of declines since 2017.
Both Morgan Stanley (NYSE:MS) and Nomura International Plc see dollar weakness becoming a negative spiral if foreign investors lose faith in returns from dollar assets.
For Mizuho, the market will be wary of Trump’s “obsession” with building a wall but the impact may be benign if he stops short of threatening another government shutdown, according to its chief foreign-exchange strategist Kengo Suzuki. The same applies for his comments on China.
“If Trump shows a hawkish stance but strikes optimism by emphasizing progress being made in trade talks, market impact will be limited,” he said.