After correcting lower since the middle of last week, and pushed faster if not further by President Trump’s comments, the US dollar is rebounding against most of the major and emerging market currencies today. After an initial wobble on the back of the FOMC minutes, the greenback’s recovery began in earnest.

The minutes confirmed the high probability of a hike next month, and there was little to cast doubt on the likelihood of a December hike as well.  The minutes revealed a more confident Fed due to the strong labor market, robust growth, and an inflation rate at the target.

Fed officials are concerned that tariffs and trade tensions risk slowing the economy and boosting prices. However, there appears to be little tangible impact yet, but the Fed is mindful. While others, such as ourselves, have expressed concern, it may be the first time that at least some Fed officials acknowledged that faster-than-expected fading of fiscal stimulus or a greater than anticipated fiscal tightening also posed a downside economic risk.

The US and China have gone forward with the levying of 25% tariffs on $16 bln of each other’s goods even though trade talks are set to continue today. Part of the low probability of anything meaningful coming out of the negotiations is that Trump rejected the deal worked out by the Treasury Department earlier in the year when China was prepared to step up its purchases of US goods.  No one else’s commitments seem to matter but the President’s which is why a resolution is only possible by a Trump-Xi meeting that could tentatively take place in November.  However, by that time, the next round of tariffs (possibly 25% tariff on Chinese goods) could be implemented.

Meanwhile, reports suggest that Trump’s intent to levy a 25% tariff on imported cars that do not meet the new domestic content rules that are being negotiated under NAFTA may be forestalling even the “handshake agreement” with Mexico (whose meaning is not exactly clear). Several issues remain outstanding, even if Canada can agree with the bilateral progress between the US and Mexico. These include red-line items like the sunset clause, conflict resolution mechanism, and rules on government procurement.