People wait at a currency exchange shop in Istanbul on August 15. The Turkish lira has nosedived in value in the past week, but some Turks are reacting with defiance to their plunging currency and an escalating trade and political dispute with the United States. Photo: AP<doc-sep>The biggest surprise in markets this year has been the US dollar. At the end of last year, many analysts expected the greenback to weaken in 2018. Instead, it’s gone from strength to strength, especially in the past few months, as US economic growth pulled ahead of other countries. But one currency has been even stronger: the Mexican peso. Compared to the end of last year, the peso is 2.3% up against the US dollar, the best-performing major currency against the greenback so far in 2018. It hasn’t been a straightforward journey. In June, the peso fell to its weakest level against the dollar in a year and a half as talks over the future of the North American Free Trade Agreement were delayed, and a presidential election loomed that threatened to shake up Mexico’s political system. The peso has since recovered most of those losses, despite ongoing ructions over trade with the US. While the renegotiation of Nafta has progressed slowly, talk of scrapping the deal entirely has subsided; Mexico, Canada, and US appear keen to come to an agreement soon (paywall). The gains in the peso ramped up as leftwing populist Andrés Manuel López Obrador won the presidential election at the start of July, with promises to ensure central bank independence, support the private sector, and rein in spending. Since the election, the dollar has weakened by 3.5% against the peso, and a Reuters poll of analysts suggests this trend will continue, even if Mexico’s currency recently succumbed somewhat to the hammering that emerging-market currencies have taken as the Turkish lira’s recent collapse spread to other markets.<doc-sep>Did President Donald Trump suddenly learn to love a stronger dollar? Some currency watchers aren’t convinced. In fact, Steven Barrow, head of G-10 strategy at Standard Bank, argued Thursday that Trump’s seeming praise of the dollar’s strength doesn’t diminish the threat the administration could eventually intervene to weaken the currency. See:New White House message: Trump, Kudlow say dollar strength is sign of confidence To be sure, Trump’s Thursday morning tweet, in which he said that “Money is pouring into our cherished DOLLAR like rarely before, companies earnings are higher than ever, inflation is low & business optimism is higher than it has ever been,” appeared to mark a significant about-face from his previous currency comments. Less than a month ago, Trump complained that a “stronger and stronger” currency was taking away America’s competitve edge. Trump has regularly complained about the ill effects of a strong dollar, accusing other countries, including China, of weakening their currencies to the detriment of U.S. exporters. The ICE U.S. Dollar Index DXY, +0.03% , a measure of the U.S. currency against six major rivals, hit a 14-month high on Wednesday and is up 2.2% in August, contributing to a 4.9% gain so far in 2018. But Trump’s tweet was followed by remarks from top White House economic adviser Larry Kudlow, who told CNBC that it was “terrific” to see money flowing into the country and praised a strong dollar for holding down commodity prices. As economists have repeatedly pointed out, the dollar’s gains have been tied in part to the administration’s actions, including Trump’s decision last week to ramp up tariffs on Turkish imports as the country slid into a currency crisis , sparking haven-related demand. And that’s after deficit-widening tax cuts amid full employment that will put additional pressure on the Fed to tighten policy and the launch of a tariff battle with major trading partners that have put pressure on some rival currencies and could also boost inflationary pressures. Related:Why the Fed can’t stop hiking rates, no matter the emerging markets pain But while that might imply that Trump is simply acknowledging market fundamentals and moving to claim credit for the dollar’s strength, Barrow argued that the more Trump praises the dollar, the more likely it is that the administration will eventually intervene in order to be seen as saving the world from a dollar that’s rising too far. Talk of potential intervention had been making the rounds, though skeptics have been quick to point out that the U.S. hasn’t stepped into the market on behalf of the dollar since 2000, Barrow said, in a Thursday note. And Barrow emphasized that a “currency war” scenario, in which the U.S. escalates a trade war by intervening to weaken the dollar is unlikely. But there is a quite imaginable scenario that could lead to intervention, he said, and markets have gotten a taste of it amid Turkey’s currency woes. He elaborates: Should a global EM crisis develop and undermine developed economy stocks and currencies, the dollar – along with the yen and the Swiss franc - will be the last currencies standing. U.S. stocks would not be saved by the strength of the dollar; indeed, there could be a double whammy here as equities become especially vulnerable given their overvaluation going into the crisis and the hit to export-related firms from the dollar’s surge. But, as we said yesterday, we sense that plunging stocks are anathema to the Trump administration ahead of the tricky mid-term elections. And, while the Fed might do its bit to ease any slump in stocks by stalling – or even reversing – rate hikes, we think the Trump administration would be sorely tempted to intervene against the soaring dollar. A response to a rising dollar in a crisis scenario wouldn’t require the support of other central banks, though they may be inclined to help anyway, he said. But the main benefit for Trump is that it would allow him to claim that intervention was being undertaken because the U.S. is “so strong.” “Should it work, the president could claim to have bought about financial peace,” Barrow wrote, “even if it was the administration that created the war through its aggressive trade tactics and tax cuts that have kept the Fed focused on raising rates.”<doc-sep>
White House economic advisor Larry Kudlow said Thursday the strong dollar is a "sign of confidence" in the United States. "There's a lot of unrest around the world. Money is flowing into the U.S.A. That's terrific," the director of the National Economic Council told CNBC's "Squawk Box." He added that he "just wants a steady" dollar and isn't trying to "pilot" the U.S. currency. "By the way, a strong dollar holds down commodity prices, gasoline prices are slipping, oil prices are slipping," Kudlow said. "In macroeconomic terms, it's sending a positive story of global confidence in the U.S.A." The U.S. dollar was lower Thursday after news that a Chinese delegation will travel to the United States later this month for trade talks. The last round of talks was in early June when Commerce Secretary Wilbur Ross met Chinese Vice Premier Liu He in Beijing. Kudlow confirmed Thursday that the U.S. and China will resume trade talks this month, but warned that President Donald Trump has a strong resolve to make sure the administration gets a good deal. Trump commented on the dollar in a tweet Thursday. Tweet 1 Markets had been anticipating Trump's comment on the currency. The dollar index was flattish Wednesday but trading near its highest level in more than year. The Chinese yuan was weakening. Trump has taken issue with the weakening yuan and has said he doesn't like a strong dollar. Last month, Treasury Secretary Steven Mnuchin told CNBC he was "closely monitoring" the weakening in the Chinese currency. In Thursday's interview, Kudlow also said a trade deal with Mexico was "getting close." Trump in March picked Kudlow to succeed Gary Cohn as director of his National Economic Council. Cohn, former No. 2 executive at Goldman Sachs, resigned from the White House role shortly after losing his fight to persuade the president not to impose import tariffs on steel and aluminum. —CNBC's Patti Domm and Reuters contributed to this report.