by Sean Wright
In the early hours of November 9th, 2016, as Donald Trump and his supporters celebrated a shocking victory in the U.S. presidential election, a different sort of shock was occurring in currency markets. The Mexican peso was in the midst of a calamitous freefall that would result in a 13% depreciation in its value, the most severe the currency has experienced since the mid-1990s. In the following weeks, the peso would continue to be pummeled as it sharply reacted to a vast array of comments and actions made by the president-elect.
Now that Donald Trump has become President Trump, currencies all around the globe are being influenced by his actions, chiefly the U.S. dollar. The new commander-in-chief has quickly demonstrated how he can single-handedly move the domestic currency, evidenced by the dollar’s withering after an executive order that removed the U.S. from the Trans-Pacific Partnership. Another, more specific example further demonstrates how Trump’s protectionist policies can negatively affect the dollar: during his inauguration speech, the dollar index (which is measured against six other major currencies) dipped almost instantaneously after the utterance of the words “America first,” illustrating how influential even a couple of words from President Trump can be.
In addition to protectionism, general political uncertainty has taken a toll on the American dollar. The announcements of policies such as the immigration ban have led to swift declines in dollar value. Many investors, wary of the potential economic repercussions of such an act, sold their dollar assets and reallocated them to what they regarded as safer ones. The dollar reacted similarly after President Trump’s announcement of a border wall with Mexico, in which he gave few details about plans for financing or constructing the wall, leading to doubts about the practicality of the plan. Additionally, events like the resignation of chief security advisor Michael Flynn and the withdrawal of Labor Secretary nominee Andy Puzder have eroded some investor confidence in the U.S. government, and thus, the dollar.
However, Trump is far from the only factor affecting the dollar. On December 5 of last year, the U.S. Joint Economic Committee released economic data from the 3rd quarter of 2016, in which they reported strong job, GDP, and employment growth during the period. This provoked an extremely positive investor response, causing the dollar to rise in value. Furthermore, the Federal Reserve has maintained an optimistic tone for the American economy. Over two days of congressional testimony earlier this month, Fed Chairwoman Janet Yellen indicated that as long as the economy continued to improve, the central bank would seek to raise interest rates at their next meeting in March. Investors saw this as favorable, and the dollar increased accordingly. Events like interest rate hikes and positive economic data will continue to boost the dollar no matter who is President.
In terms of his own monetary policy, President Trump has recently accused countries like China and Japan of devaluing their currency for trade benefits. One might ask, why would the depreciation of a country’s currency be positive for their trade prospects? When the value of a country’s currency drops, goods in that country become cheaper for foreign consumers. With diminishing prices, these foreign consumers will purchase more goods from said country, leading to an increase in sales for those firms. Consequently, many Japanese and Chinese firms have increased their future profit forecasts, indicating that they have become more optimistic. President Trump has a variety of options going forward, and surely will be working closely with his economic advisors to chart a course of action. However, the devaluation issue wasn’t mentioned at a February 10th meeting between Trump and Japanese Prime Minister Shinzo Abe; investors will be watching closely for any kind of further comment from Trump, as it will surely warrant a reaction by both the American dollar and the Japanese yen.
The President of the United States has always had a notable influence on currency values, but few have caused such sharp movements as quickly as the new commander-in-chief. Trump, with a Twitter account that could send the dollar skyrocketing or spiraling at any time, must show more restraint when speaking (or tweeting) publicly. For the dollar to maintain a feasible level of stability, the first thing that Trump needs to do is take a deep breath, reign in his personnel, and attempt to govern fairly and diplomatically. If President Trump can’t even create the appearance of a steady, durable administration, the American dollar will continue to be a victim of volatility bouts for the rest of his presidency.