FxWirePro: Key factors influencing dollar drain

The rigorous dollar draining by several means is likely to weigh on the global economy.

Factors influencing dollar drain:

Firstly, as President Trump secured funding for the U.S. military for two consecutive years along with a large budget approval for this year, the Treasury has been using dollar-denominated bonds at a record pace; thus draining dollar liquidity from the system. The net treasury issuance is expected to hit $1.3 trillion in 2018, almost double of what has been issued in 2017, and highest since 2010.

Secondly, the U.S. Federal Reserve has been reducing its balance sheet since last year and that too is draining dollar liquidity from the System. Since April last year, the U.S. Federal Reserve has reduced its balance sheet by $179 billion.

Thirdly, U.S. provides dollar liquidity to the rest of the world through its massive trade deficits, where the balance of trade has hit more than $500 billion in 2017. President Trump is planning to drain this liquidity too by reducing U.S. deficit.

And finally, due to the tax cuts and reforms, Companies are planning to bring large portions of their overseas cash back to the United States. Currently, $3.5 trillion worth of corporate profits are parked outside the United States and based on Bloomberg survey, where 90 percent of the companies said they would repatriate portions of the cash back, we suspect that the repatriation would reach $trillion mark over the Trump Presidency.

Dollar interest rate rise:

At the same time, the U.S. Federal Reserve is making the dollar financing costlier by raising the interest rates in the United States.

Some effects of the Dollar drain is quite visible in the market. Below is the EM currency performances against the USD in 2018,

Chinese yuan: -1.9 percent

Thai Baht: -2 percent

Korean Won: -4.7 percent

Indonesian Rupiah: -6.3 percent

Hungarian Forint: -6.5 percent

Indian Rupee: -7.2 percent

Turkish Lira: -18 percent

Argentina peso: -34.7 percent