The dollar gained following Trump’s election victory in expectation of fiscal stimulus and higher interest rates. To the financial markets’ surprise, since inauguration, the Trump administration has been focused on immigration and trade. The proposed policies and executive orders have not been seen as supportive of economic growth meaning dollar gains have stalled or reversed in 2017 as financial markets eagerly await further details of tax cuts and stimulus measures.
If details of fiscal stimulus fall short of investor expectations or fail to materialise over the coming weeks/months, the dollar should falter as markets will reassess the extent of interest rate hikes by the Federal Reserve.
What is the Trump Trade?
Trump has proposed adjustments to border taxes, which could dramatically increase the cost of imports. Specifically, Mexico may potentially face a 20% tax on exports to the U.S. as a means to subsidise the cost of the wall along the U.S. Mexico border.
Trump has also lambasted China for the U.S.’s, if not the world’s, economic woes. If he implements restrictions like tariffs or quotas, any tit-for-tat trade restrictions that may arise between the two nations could create a ripple effect across other major economies including Europe, the U.K. and Australia.1;
In short: Trump Trade = fiscal stimulus = higher inflation = higher interest rates = stronger dollar.
What is Trumponomics?
The Trump administration is proposing to increase fiscal stimulus in the U.S. by cutting taxes and issuing debt. The funds raised will be reinvested into the economy with the goal of stimulating economic growth through job creation and increased consumer spending.
The Federal Reserve sets monetary policy rates and guidance independent of the government. Trump’s fiscal stimulus is expected to add to U.S. inflation which is already relatively high in comparison to other developed economies (Australian inflation is at a yearly rate of 1.5% while the US is at 2.1%). One of the major concerns and mandates of a Central Bank is to keep inflation within a comfortable range in order to maintain/improve the standard of living. If inflation is high, monetary policy will temper this via higher interest rates
According to the Economist, ”should Mr Trump’s efforts to make America great again through tax cuts and spending lead to ever larger budget deficits and rising inflation, American assets might lose their lustre”.
Meanwhile, the Financial Times’ Gillian Tett suggests that Trump may not be as influential as he claims: “The so-called Trump rally, in other words, is not really about the president, but a wider hope about reflation. After all, the US economy is growing healthily, and corporate earnings rose about 7 per cent in the last quarter. Meanwhile, the tone of western government policy is — finally — shifting from monetary stimulus to structural reform.”3
When trying to understand how Trump affects the US dollar, the question is: are investors focusing too much on the potential benefits of tax cuts when trade barriers and protectionism could pose serious threats to the economy?
What Does Trump Mean For Your Money Transfer?
Despite all of Trump’s bluster, it’s important to remember that 2017 brings with it a number of critical elections in Europe as well as the aftermath of the Brexit vote in the U.K. If a populist mindset prevails in Europe, the European Union, and the euro, could face serious hardships. One thing is for sure, substantial currency volatility is likely to continue through 2017. Over the last year, the Mexican peso saw a range of 25% and was hard hit by Trump’s rhetoric. The range for the Japanese yen was 17% as investors sought a safe-haven during pre-election jitters. If you need to send money overseas and you’re concerned about these large fluctuations, OFX offers risk management tools to help you protect your money from adverse market events.
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IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. OzForex Limited (trading as OFX) and its affiliated entities make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.
