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Dollar holds firm with NAFTA in the spotlight

manufacturing parts for car engineThe US dollar managed to tread water on Monday after an agreement was reached over a major international free trade accord.
The North American Free Trade Agreement, or NAFTA, is back in the spotlight after the US and its southern neighbour Mexico said they would introduce changes to the way it operates in practice.

While the full details of the new agreement have not yet been revealed, it’s understood that the car manufacturing industry will be in the spotlight in particular.

At present, around 62% of car parts sold in North America have to be made in Canada, the USA or Mexico, but under the new deal, three-quarters will need to be made in either of the latter two states.

When trade barriers appear to be high, traders often head over to the US dollar as a “safe haven” for their investments.

However, as a result of these developments around NAFTA, the dollar index, which monitors the greenback’s performance compared to a range of other major international currencies, only managed to go up by around 0.05% to 94.834.

This rise was marginal in size, but it was a stronger performance compared to the losses it had suffered in recent days.

The dollar has plunged more than 2% since the middle of July, and the recent NAFTA developments look set to stymie its growth even more.

Last week, the main source of frustration for the struggling dollar laid in the ongoing row between President Donald Trump and the leadership of the Federal Reserve banking system. The latter appears keen to raise interest rates further across the rest of 2018 and has hinted in recent media appearances that this could even happen twice. However, Trump’s administration has taken the unusual step of publicly condemning this, saying that it could risk economic growth.

Other currencies were able to surge ahead somewhat into the space left by a seemingly declining dollar.

The Mexican peso, which is the other major currency affected by the recent trade developments, managed to rise 1.2% following the news. By the end of the day, it had finished 0.8% higher than its starting point.

The main sticking point for the deal now will be the response of Canada. NAFTA included Canada in its remit, but according to a statement from President Trump the new trade deal may simply be called the “United States-Mexico trade agreement”, leaving it unclear whether Canada will even be involved.

The rest of the week is looking busy for the forex markets, with plenty of economic calendar events on the cards.

Wednesday sees a number of data releases from the UK, including national house price data at 6am GMT.

The impact of the new trade agreement details on Canada will no doubt be in the spotlight again on Wednesday, too, when the country’s current account data for the second quarter of 2018 comes out at 12.30 GMT.

Japan will also see plenty of releases late on Wednesday, including foreign bond investment information and retail trade data.

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