Has Trump Changed the US Dollar?

Donald Trump

Donald Trump is breaking the presidency mould. While the U.S. and the world at large is coming to deal with this change , we ask the question: Has Trump changed the U.S Dollar?

In the short-term, yes he has.

Interest Rates

Exchange rates have a lot of different influences. Most of the time, the biggest influence is interest rates. The higher the interest rates in a country, generally the stronger that currency is.

Financial markets are always trying to predict what will happen in the future so if there is the expectation that interest rates will rise in the future, this can also push the value of that currency higher.

In 2016, the world was expecting interest rates to move higher and they eventually did. As a result, the US dollar also went higher.

This graph is of the US dollar index. A stock exchange index like the Dow Jones gives an indication of how a group of companies are going. The US dollar index is similar. It shows how the US dollar is performing against a group of different currencies including the Euro, Japanese Yen and the British Pound.

So after trading sideways for a number of years, the US dollar moved higher in the second half of 2016.

Then came the election.

Trump Talk

Financial markets are still coming to grip since the election result in November. At first, Trump indicated he would target a number of policies that would stimulate the economy. Markets predicted that this would have a positive flow on effect in the economy and could mean interest rates continued higher.

US Dollar Map

The U.S dollar went higher in anticipation.

Then, a couple of weeks ago, Trump came out saying the U.S. Dollar was “too strong”. This is know as jawboning and it's nothing new. Jawboning is when people of influence make public comments in order to direct or change the direction of a currency.

On this occasion it worked. And as the graph above shows, the greenback has fallen since the comments.

So What Happens Now?

In the past, jawboning has had limited affect. Over the long-term, exchange rates tend to revert back to economic fundamentals such as interest rates and economic growth. If the U.S economy continues to outpace most of the developed world, then their interest rates will rise and so to, their dollar.

If the economy slows and anticipated interest rate hikes are put on hold, then expect the U.S dollar to weaken.

 

 

General advice: The information on this site is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions.

 

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