US: President elect Trump contributing to a more volatile USD – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has rebounded modestly in the Asian trading session recovering some lost ground after yesterday’s sharp sell-off.

Key Quotes

“The correction lower for the US dollar at the start of this year has resulted in the dollar index falling back towards the 100.00- level leaving it broadly unchanged over the last couple of years. The recent shift in the market’s focus on to President elect Trump’s more protectionist trade policies is challenging the initial favourable view that the US dollar will strengthen on the back of looser fiscal policy and tighter monetary policy in the year ahead.”

“President elect Trump’s comments yesterday signalling concern over the strength of the US dollar albeit against the renminbi specifically have further undermined the US dollar bull case in the near-term. The comments highlight the risk that the Trump administration could adopt a weak US dollar policy and attempt to talk down the currency to support the US manufacturing sector. Donald Trump has previous as well when talking about the US dollar. In August 2015 he stated that its rise “is going to hurt us very badly” and while “it sounds good to say we have a strong US dollar …that’s about where it stops”.”

“Anthony Saramucci who is a senior member of Donald Trump’s economic advisory council also expressed yesterday some unease over the strength of the US dollar. He stated that while “we have to be careful about a rising dollar, if you get better than expected growth in the US, you can have a strong dollar and robust growth in the US that will lift the global economy”.”

“The overall result so far is that the election victory for Donald Trump has contributed to a more volatile US dollar. The performance of the US dollar is likely to be choppy in the year ahead. On balance, we still believe that the combination of looser fiscal policy and tighter monetary policy should help the US dollar to strengthen further. Attempts to talk down the US dollar are unlikely to prove effective on a sustainable basis if President elect Trump delivers a significant loosening of fiscal policy which helps to boost growth and interest rates in the US.”

“The shift to a more hawkish stance at the Fed is clearly underway. Even uber dove Brainard sounded more hawkish yesterday stating that she now believes that risks in the domestic economy are closer to balanced than they have been in a long time. If changes in fiscal policy under President elect Trump quickly eliminate labour market slack, she stated that the Fed was likely to raise interest rates more rapidly. By attempting to dampen US dollar strength, it could help to speed up the pace of Fed rate hikes which would then challenge the effectiveness of verbal intervention.”