Emerging currencies, such as the Vietnam Dong, the Indian Rupee, the Turkish Lira and offshore Chinese Yuan have reached new record lows against the American dollar.
There have also been drops in other Asian currencies.
Some have reached levels not seen since the global financial crisis.
Market participants like Trump’s fiscal policy
According to HSBC, there are 4 reasons why markets are currently pushing the American dollar higher:
- Fiscal policy: Trump plans to implement a more flexible fiscal policy. This should push the dollar higher in front of faster interest rate hikes, as it will fuel inflation.
- Trade policy: Emerging economies (and currencies) may suffer from Trump’s desire to implement a more protectionist trade environment for America.
- Income repatriation from overseas: If money is repatriated to American soil, it should be positive for the USD. Even though we can’t calculate how much overseas funds are in USD.
- Immigration policy: The fact that Donald Trump is strongly in favour of deporting undocumented immigrants is negative for the USD. This would mean that the labor supply will decrease and will have an impact on American growth.
By the same token, these factors may also drive the US dollar downwards over the long term. We’ve seen a softer approach from Trump since the elections. However Trump’s handling of the Federal Reserve and public debt will be pivotal in this.
Under the Trump administration, market short-term expectations of faster inflation, thus higher interest rates, are increasing.
Even if we don’t know if any of Trump’s proposals are going to materialize, his tax cuts, deregulation, and infrastructure spending promises are positive for the greenback.
On the American consumer’s side, a strong dollar means that their currency will be able to buy more of another country’s goods or services – which is good for imported products. It’s also good for shopping season and overseas tourism.
On the other hand, American companies that are mainly exporting their products to foreign customers will suffer, as their products will be more expensive abroad. American producers are then disadvantaged in the global market. Those companies may look to compensate by delocalizing their manufacturing sites abroad.
Markets Price in Rate Hike Certainty
What is keeping the dollar at such a high level – almost a 14-year high? There is now nearly 100% odds that the FED will increase its interest rate in its December meeting. On Wednesday, the FED released the minutes of its November meeting, which was concluded a few days before the American election.
FED members kept interest rates on hold in November, but had commented that the case for a rate rise in the near future had strengthened. They were waiting to see “some further evidence” though, regarding progress toward its dual mandate (full employment and price stability with a PCE at 2%).