09 Feb 2017

Trump’s 3am Million Dollar Currency Call

No wonder the dollar is losing the gains it made when Donald Trump won the US presidential election. There’s been nothing but chaos since he took office and no sign of any of the economy stimulus, tax plans or trade deals that made investors so optimistic about him as the US President. In one of the many leaks that have come from the new administration, the new president’s economic savvy appears alarmingly naïve. Did he really phone his National Security advisor at 3am to ask whether a weak or strong dollar was better for the US? His competence as a businessman was his key strength as a candidate, with many of his supporters expecting him to share the skills that made him wealthy with struggling Americans. Now it’s revealed that the president not only isn’t sure how currency works, he doesn’t have an economic advisor he can turn to and has to trust someone who isn’t qualified. Even worse, embarrassment over the leak is likely to make President Trump less likely to ask the questions that would help him learn the answers to vital questions, like these.

Politics weakening currencies
Trump’s describing the dollar as “too strong” has been called him jawboning the currency, because it had the immediate effect of knocking it down, making his wish of having a weaker dollar come true. The US dollar, Pound and euro all share the same precarious political fortune, these days. The pound having lost so much ground to Brexit will remain pinned to the negotiation news, rising and falling in reaction to the agreements. The weak pound has led to increased inflation, as Brexit begins to take a bite out of British budgets. With the pound having fallen by about 17% against the dollar since the referendum vote, the costs of imports is rising and being passed on to shoppers who are making do without.

Americans can expect the same increase in inflation and reduction in spending if the dollar decreases. Trump felt that a weaker dollar would have a positive effect on exports, which, in turn, he said, would increase employment. The market reaction to his election was a strengthened greenback on expectation that his policies would grow the US economy. In reaction to Trump’s “erratic” first week’s policies, however, strategists at J.P. Morgan are suggesting shorting the dollar against Swiss franc and yen.

Globalisation means devaluation is detrimental
Trump’s bemoaned the US dollar being “too strong”, especially compared to the Chinese yuan, saying “Our companies can’t compete with them now.” US policymakers have traditionally sought to keep the greenback strong. With a strong dollar, consumers purchase more inexpensive imports and foreign investors find the country a good risk. Cheaper borrowing rates make houses more affordable, supporting a key aspect of the economy and a sector where job growth is an important indicator of economic well-being. Presumably, these would be sacrificed as trade-offs for increasing exports. But would the benefits of a weaker dollar outweigh the consequences of a weak currency?

In the UK, weaker sterling isn’t helpful for exporters because, in a global marketplace, currency fluctuation is a double-edged sword hurting as many businesses as it helps. A report by the British Chambers of Commerce (BCC) found that a weak pound was especially difficult for small to medium sized firms that rely on imports. The BCC’s report said that nearly half of the companies surveyed didn’t manage currency risk and had no future plan to put a strategy in place. This is remarkable when you consider that the report also said that 22% of the firms blamed currency weakness for profit loss. Also, the orders didn’t flood in: Only 25% of the companies surveyed said that sterling’s weakness had increased their export levels.

UK Inflation hardest for JAMs
Official December inflation rates revealed that UK costs had increased at the highest rates in 2 ½ years, due to the drop in the pound’s value. The 1.6% rate was higher than the 1.4% predicted as the price of fuel, food and air fares were all up from 1.25% in November. Clearly, if prices keep increasing at this rate in 2017, family finances are going to be sorely squeezed. Apple just put prices up by nearly 25% on its UK app store to keep up profit margins after the pound’s depreciation.

The Joseph Rowntree Foundation has said that brunt of these rising costs will be felt by lower- income families. The charity reported that “People in the bottom 5th of the income scale typically spend £1 in every £6 on food, compared with £1 in every £12 for the richest 5th.” Since consumer spending drives growth, this decrease in spending shrinks the economy. Ironically, it makes life more difficult for the most vulnerable-those who voted for change imagining they’d end up with more of it in their pockets, presumably. So how does that leave those already “Just About Managing”, or JAMs?

So, the obvious question for Trump’s simplistic economic plan is how his reducing the dollar will manage to benefit middle class Americans. Won’t increasing inflation cut spending, just as it has in the UK?

Dollar ignores Trump’s tweets
A Reuters poll of over 60 foreign exchange strategists predicted that the dollar will strengthen, once there’s more clarity about Trump’s tax and spending plans. Around 70% of the forecasters said that Trump’s policies would drive global currency markets this year. They were in consensus that the euro would weaken nearly 3% against the dollar and sterling would lose another 1.5% once Brexit negotiations commence.

They’re confident that Trump’s tweets will become the new normal, and the market will largely ignore them. They suggest that the dollar may see an extreme spike or fall “driven more by U.S. President Donald Trump’s expected fiscal stimulus than by his words.” What would infuriate Trump more, though. Will Trump throw a bigger tantrum when the dollar disobeys him or will ignoring his “normal temper tantrum” be his undoing?