Since Donald Trump’s electoral victory in November 2016, watching the news has fluctuated between comedy and drama, with the stories often lacking substance but maintaining human interest with sensational headlines. As a very experienced and successful businessman, Trump’s economic policy proposals have garnered interest and generated excitement as people wait to see if his no-holds-barred economic policies aimed at deregulating Wall Street, cutting taxes and increasing infrastructure spending will bring the desired changes to America’s middle class. However, as a powerful leader with no real political experience, questions of Trump’s ability to implement his policies have kept people wondering whether his presidency will bring about the changes he was elected to bring forth.
In the first 100 days of Trump’s presidency, the U.S. stock markets saw their second best post-election rallies since JFK, with S&P 500 Index gaining 11.6% — topped only by the same period under George H.W. Bush, which saw the S&P gain 12.3%. The Dow Jones Industrial Average gained 14.2% during Trump’s first 100 days, and the Nasdaq Composite climbed 16.5%. But while the “Trump rally” may be exciting for traders invested in the U.S. stock markets in the near term, the potential long-term problems that may arise if Trump cannot push through his proposals could wreak havoc not only on the United States’ economy but also on the global economy.
What About The Dollar?
Investors looking solely at stock market movements may simultaneously be thrilled with the Trump rally and nervous about how and when an inevitable crash will arrive. But currency traders who are focused on the dollar’s movements will be looking at shorter-term possibilities, as well as other factors such as Brexit, European elections, and even Trump’s uncensored Twitter comments that can (and have proven to) send the dollar fluctuating within seconds. The currency that has seen the highest volatility due to Trump’s Twitter usage is likely the Mexican peso, which has struggled significantly since Trump’s election day, and even more so since his electoral win. After a tweet from Trump on January 3, 2017, in which the soon-to-be president called for high taxes on Mexican car imports, the peso/U.S. dollar pair traded down 3.5% over two days — a move that demanded intervention by Mexico’s central bank.
And yet, the peso isn’t the only currency to struggle during Trump’s short presidency. The dollar itself has been floundering recently, with the dollar index (DXY), a measure of the greenback’s strength against a basket of currencies, down more than 6% between January 1, 2017, and the end of June — of which roughly 5% came after Trump’s inauguration on January 20th. The fall of the dollar is due in part to Trump’s inability to pass his healthcare reforms, the Federal Reserve’s move to raise interest rates, Trump’s challenge to existing trade deals and his commitment to reducing imports, and at the same time, the continued strengthening of other global economies, especially in the Eurozone.
Why Does It Matter?
A weaker dollar makes it easier for countries in the rest of the world to afford U.S. goods, creating the ability for these countries to capitalize on opportunities. On a more local level, a weaker dollar also creates opportunities for currency traders to find trade opportunities in dollar-based currency pairs. The current weak state of the dollar also impacts the recently struggling oil prices, as there tends to be an inverse relationship between the strength of the dollar and the price of oil.
When evaluating your investment strategy, no matter what vehicle you’re investing with, it’s important to consider how the dollar’s recent volatility could impact your portfolio and results in both the short and long term. Donald Trump appears to be a wild card when it comes to political policy, and his success will directly impact the dollar. Make sure to diversify your investments and to consider mitigating your risks by taking some positions that will benefit from Trump’s successes and others that will see gains if he fails. Whatever positions you take, even if they are long-term positions, consider watching your portfolio closely during Trump’s time in office and adjusting as necessary, as we’ve entered uncharted territory that may impact your investments in unusual or unexpected ways.