Donald Trump shocked the world early Wednesday morning by gaining the 270 electoral votes necessary to defeat Hillary Clinton and winning the US presidential election.
Trump will be sworn in as America’s 45th president in January.
After a particularly contentious and vitriolic election in America, many questions remain about Trump’s economic policies, and how these will impact investors, businesses, and anyone holding US dollars.
Here is what you need to know about the Trump presidency and how it could affect the value of the dollar.
How the Dollar Behaved in the Run-Up to the Election
In the days before the election, there was a strong positive correlation between the dollar’s value and Clinton’s chances of winning. As her polling numbers grew, so did the greenback’s strength.
“World stock markets surged on Monday [7 November] as investors grew increasingly confident that Hillary Clinton will win the US presidential election, after the FBI said it would take no further action against the Democratic nominee over her use of a private email server,” Guardian reporter Rupert Neate wrote.
“The three main US indices all ended the day more than 2% higher, following strong gains in markets across the world. The US dollar also strengthened and the oil price ticked up by more than 1% in further signs of traders’ confidence in a Clinton victory.”
Despite many investors’ betting on a Clinton win, Trump’s victory was not cataclysmic for the dollar — probably because investors had so recently been surprised by British voters.
Markets and Banks Learned from Brexit to be Prepared for Anything
At the beginning of the week, Forex Crunch released a primer on the US election for currency traders. That piece predicted a rise in safe haven currencies — the Swiss franc and the Japanese yen, specifically — following a Trump victory.
Both Japan and Switzerland were prepared, too.
“The Swiss National Bank stands ready to intervene in the currency markets if the outcome of the U.S. election triggers a rush into the safe haven currency, a member of the central bank’s governing board said on Monday,” John Revill at Reuters reported. “… In June, the SNB gave a rare confirmation that it had intervened in the currency market to weaken the Swiss franc in the wake of Britain’s vote to leave the European Union.”
Most prognosticators were spot-on thanks to that readiness. “The dollar could suffer against its major counterparts such as the euro and, especially the yen, if investors’ instant reaction is a retreat from risk,” the Financial Times [subscription required] wrote Monday. “And in that scenario, expect a pop in the Swiss franc, too, and another bounce in gold.”
Experts have a less clear picture about how the pound and the euro will react to Trump’s win because each currency has its own particular challenges at the moment. “Both EUR and GBP are NOT classic safe-haven currencies and could fall in reaction to such a move,” the Forex Crunch guide says. “The US dollar will still lose out to the yen and the franc, but not to the euro nor the pound on a Trump victory.”
Among developing currencies, however, experts predicted the dollar would rise following a Trump victory because of protectionism fears and Trump’s anti-Mexico rhetoric, the latter of which would hit the peso hard.
How the Dollar Responded to the Political Fallout
Most of the predictions above came true in the early morning hours Wednesday, although the Swiss franc’s rise proved temporary, and the dollar rebounded shortly after Trump’s victory speech.
The EUR, in particular, broke through a “tough” couple of lines of resistance, ending up above 1.1220 USD for a while. However, the EUR fell shortly thereafter, back toward 1.10, and Forex Crunch warns “it could even end the week lower.”
The pound also saw a brief spike, Pound Sterling Live reports, clearing the 1.2548 USD threshold, though its gain was also temporary.
All of this suggests a resilience in the US dollar after all of the gains it made against most currencies in the last year.
Also notable were the Russian ruble, which fell sharply after the election, and the Mexican peso, which fell by more than 13 percent against the dollar before rebounding to 19.88 per dollar. Michael O’Boyle and Noe Torres at Reuters report the Mexican central bank and finance ministry will make a concerted effort to support the currency against capital flight.
So, why didn’t the dollar tank the same way the pound did following Brexit? According to David Kelly at J.P. Morgan Asset Management, it has to do with the fundamentals of the American economy.
“Real economic growth has picked up in recent months while the unemployment rate, at 4.9%, is close to any economist’s definition of full employment,” he tells The Guardian. “S&P500 earnings have rebounded smartly from the oil- and dollar-induced slump of 2015, and inflation is still moderate.
“Moreover, the global economy is also showing signs of life with the global manufacturing PMI index hitting a two year high in October. All of this, absent political uncertainty, would be positive for stocks and negative for bonds.”
Hold that “absent political uncertainty” thought for a moment.
Big-Picture Economic Challenges President Trump Must Tackle
So, initial Trumpian currency panic appears short-lived. However, he does inherit an American economy with real issues. Ben Casselman at FiveThirtyEight lays out a handful of the most pressing issues:
- Low unemployment, but not robust employment opportunities for job-seekers
- Slow, stagnating productivity growth
- Decreased economic dynamism
- Socioeconomic mobility that ranks below many European countries
How Trump navigates those issues during his term could test the dollar’s resilience. After all, there is still plenty of political uncertainty about his plans to tackle the above issues.
“Donald Trump has no record of public service and offers an incoherent economic agenda,” reads an open letter to American voters, signed by 20 different winners of Nobel Prize for Economics.
“His reckless threats to start trade wars with several of our largest trading partners, his plan to deport millions of immigrants, his trillions of dollars of unfunded tax cuts, his casual suggestion that the United States could threaten default on its debt in order to renegotiate with our creditors as if Treasuries were a junk bond — each of these proposals could jeopardise the foundations of American prosperity and the global economy.”
Others are more bullish on a Trump presidency.
“Trump’s proposed re-write of the US tax code could bring a big shift in USD fundamentals,” Greg Anderson, global head of FX strategy at BMO Capital, tells Pound Sterling Live. “Reducing US corporate taxes and closing loopholes has the potential to dramatically alter the competitiveness of American business and therefore the long-run equilibrium of the dollar.
“Without knowing all the details on the loophole closures, it’s hard to be definitive, but we (BMO FX Strategy) tend to view corporate tax reform as long-run positive for the USD.”
Bloomberg also forecasts the dollar could strengthen against many currencies thanks to tax cuts and spending increases.
Still, there is a forest-for-the-trees quality to this line of thinking. If the dollar’s value is buttressed by some of Trump’s more notorious policy promises, then investors and consumers will face much, much larger issues than the dollar’s relative value.
On Monday, the Economist took the pulse of liberal democracies in the West, and its prognosis was grim:
“It is important to understand that liberal society is not immutable. There is not much holding it up apart from the institutions we build, which themselves rest on a fine balance of costs and benefits. Mess around with those costs and benefits enough, and the thing can come crashing down.”