The following is a guest blog post:
November the 8th saw Donald Trump claim a surprise victory in the US Election which sent shockwaves across the financial markets. During the build-up to the Election itself there was a great deal of speculation surrounding just what might happen to the dollar and whether or not the financial markets would be significantly affected.
Now with the benefit of hindsight, we can look back over this event to see if any fluctuations or major changes have occurred.
Firstly, it’s worth examining some of the pre-election forecasts to see if any of these predictions were indeed accurate.
There was a great deal of interest around exchange rates, particularly amongst foreign investors in the run up to the Election. Major political events like this typically do lead to instability on the strength of that nation’s currency as there’s a notable amount of uncertainty surrounding what the future is going to bring; this was, it’s fair to say, exacerbated by the turbulent nature of both Mr Trump and Ms Clinton’s electioneering. What’s more, investors from outside the US also affected the situation, as they understandably had concerns about a weaker currency devaluing their investments; this was regardless of who would win the race for the White House.
Mr Trump’s aggressively conservative policies added to this uncertainty as he made no secret of his desires to reduce the amount of non-American imports and move as much production as possible back to US shores. This again was fuel to the fire for uncertainty around the value of the dollar, although some also thought that while this wouldn’t help external investors, it would be good news for American citizens – and by extension the economy – as they would be able to make the most of cheaper US-made products.
Another key aspect that many thought would play a big factor was the Brexit vote. This similarly surprising result saw the British pound sink to record-low levels; the simple truth here was that forecasters were speculating that a win for Trump would see a similar set of circumstances for the US economy.
In the immediate few days after Donald Trump won the Election, what we actually saw was the highest rise in the value of the dollar for nearly a year.
Despite the expectation from many that the dollar would plummet, Mr Trump’s win saw a significant increase in foreign exchange traders buying dollars – possibly on the back of the likelihood inflation will rise as and when the President-elect starts to spend money on America’s infrastructure.
Recent Developments and The Future
Now we are nearly a month past the US Election result and the dollar has remained relatively strong, but there are warning signs that things could be about to take a turn for the worse.
The strong dollar has been met with an err of caution from Mr Trump himself. This post on the Financial Times, which quoted an interview he held with CNBC explained how the ‘firmer dollar is a double-edged sword’ with Trump saying ‘while there are certain benefits, it sounds better to have a strong dollar than it actually is’. This is because this strength comes before the full implementation of his economic policies and ultimately, if this rise continues, the only way is down – which will certainly be problematic when the President-elect tries to justify the deficit so soon after his respective policies are in place.
We’ve already had indications of another future problem which could affect the dollar’s value and this is in relation to the direction of oil production. There’s no escaping the fact that oil is hugely important to the US, but with Mr Trump’s focus on reducing imports there have been concerns about how this will affect America’s relations with major-producers such as Saudi Arabia.
This article from MarketWatch can vouch for this as it explains how the dollar has already fallen ‘sharply against the yen and other currencies’ as a result of this uncertainty. Moreover, Stephen Innes, a senior foreign exchange trader at OANDA commented that ‘Guys are very, very nervous about the oil scenario and you see that expressed in the sensitive [currency] pair’.
So, it does look quite likely the future could well bring more major fluctuations – just how severe these are will be determined in Mr Trump’s first 100 days.