U.S. Populism Already Depressing the Dollar

November 28, 2017

The dollar has lost approximately 13% against the euro, 6% relative to the yen, and 9% on a trade-weighted basis compared to its strongest levels since the November 2016 U.S. election. The dollar has declined so far this quarter by a bit about 2% against the common European currency on top of a 3.3% drop during the third quarter. The yen, which had been trendless in the summer, has been a step ahead of the euro this autumn. Despite a continuing lack of progress in Brexit talks, even the pound has more or less matched strides with the dollar.

The dollar ought to be performing better. As December beckons, perceptions about the 2018 economic outlook are more meaningful to investors that what happened in 2017. It’s been rare for growth in the euro area to outpace that in the United States as happened unexpectedly in 2017, but conventional wisdom assumes a return to the usual configuration in 2018 and 2019. Europe is contending with its own political uncertainties: the prospect of a minority government in Germany, French President Macron’s sharp loss of support, and all-around dysfunctionality in Great Britain. Japanese growth trails trends in both the United States and Europe. The U.S. current account deficit remains stably manageable, and inflationary and deflationary risks are both low. The Fed’s getting a new chairperson, but this shift does not appear to mark a shift in monetary policy priorities.

Currency markets generally march to the beat of short-term factors, so the dollar’s failure to capitalize on reasonably favorable economic fundamentals suggests that in the current instance factors of a longer-term nature are playing the dominant role. President Trump’s stewardship packs a load of reasons to be concerned.

  • The evolution of Robert Mueller’s investigation into Russian influence in the 2016 election and possible collusion by the Trump campaign is highly uncertain. But whereas the Nixon administration’s domestic agenda was paralyzed by the Watergate inquiry in 1973-74, several key policy changes loom currently.
  • The tax cut bill, if passed, would promote income and wealth inequality. Evidence suggests that such inequality has been one of the factors behind slower U.S. economic growth this century.
  • A U.S. tax cut is also likely to weaken health care coverage and lift its costs.
  • The Trump Administration is pursuing immigration, industrial and education policies that are dumbing down the labor force’s skills in 21st century industries, ceding leadership in such strategic sectors to countries that are more welcoming.
  • Few policies received as much criticism by candidate Trump as the U.S. trade deficit, yet the president has refrained from declaring China or anyone else a currency manipulator. Once the tax bill is dealt with, it seems likely that trade will get a lot more policy attention.
  • The one area of government expenditures likely to be most insulated from the budget axe is defense. History suggests that superpower countries that pursue military spending at the expense of domestic infrastructure and social safety eventually relinquish that role.
  • Broad financial deregulation, the rollback if you will of safeguards imposed after the 2007 financial crisis, increases the likelihood of a future financial disaster.
  • The rule of law rather than men, which has been the bedrock of America’s success for over 200 years, is now jeopardized by the administration’s attack on the watchdogs like the press and intelligence community that ensure that laws are enforced indiscriminately.

The resilience of the share prices and long-term interest rates seem consistent with a firmer dollar that what 2017 produced. One explanation for this underperformance is that markets are pricing into the dollar’s value all the intangible risks that an unpopular president making wholesale changes from the past now presents. To the extent that a country’s currency embodies the present value of a nation’s future, it’s not surprising that the dollar didn’t perform better than it did over the past year.

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



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