Populism Not a Good Recipe for Currency Strength

June 28, 2017

Among highly developed countries, the United States and Great Britain are some of the best examples in which the politics of populism has made the greatest inroads. Sterling is roughly 14% weaker now against the dollar than when the Brexit referendum was approved a little over a year ago, but even the pound has appreciated against the dollar since Donald Trump was sworn in as the 45th U.S. president almost six months ago.

The list of currencies that have strengthened against the dollar during the Trump presidency is much longer than the list of currencies that have lost value. Besides sterling, the U.S. dollar has lost ground to the euro, yen, Swiss franc, yuan, Australian dollar, New Zealand dollar, South Korean won, Indian rupee, Taiwan dollar, Singapore dollar, South African rand, and Mexican peso. The short list of monies against which the dollar has appreciated since January 20th includes the Brazilian real, Colombian peso, Turkish lira, and Philippine peso. Each of these has its own shade of populism.

Sterling’s underpinning was compromised further by this month’s election that left Prime Minister May’s government considerably more fragile than the one she inherited. The Conservative-led British government now has the oxymoronic combination being both weak and populist-based heading into critically meaningful negotiations with the EU and rest of the world. The outcome will shape Britain’s economic fortunes for decades to come. Because of sterling’s depreciation, Britain is one of few countries to lately experience above-target inflation. This may compel the Bank of England to raise interest rates even as growth softens. Financial services, a mainstay of the U.K. economy and a sector that relies upon seamless access to conduct business with the rest of the world and the full trust of non-Britons, appears particularly vulnerable.

The Trump presidency has ushered in a raucous brand of politics that feels like a domestic cold war between the administration’s supporters and its opponents. No major legislation has been achieved, but a potential for major change in domestic law and foreign affairs remains possible. Even so, toxic imbalances like widening income inequality at home, a social safety net for the neediest citizens, and the challenge of avoiding catastrophic wars in a world that no longer can count on the United States assuming the role of leader of the free world. Aside from soft economic growth, the U.S. is weighed down by two addictions, one to Opiods that is shortening life expectancy, and the other to electronic devices, with a slew of collateral problems ranging from inattentive drivers to elections influenced by hostile foreign nations and the widespread disrespect of science that may exclude the U.S. from the cutting edge in future technologies.

Notwithstanding catchy slogans like “Take Back Control” and “Make America Great Again” that promise happier days, it’s not surprising that the infection of populism has been accompanied by slippage in the external value of their money, which are symptoms of eroded confidence in the future value of such countries’ economic potential. Human history is littered with experiences in populist government that shared unhappy endings.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


Tags: ,


Comments are closed.