Stronger dollar prompts White House-Fed fallout

The rising dollar has put strain on the relationship between the Fed and the White House, but it’s a situation that is not going away.

Source: Bloomberg

US President Donald Trump had many reaching for the smelling salts last week when he publicly commented on the strength of the US dollar and then went further by directly criticising current Federal Reserve (Fed) policy, on the basis that it hurts America’s competitive edge. 

This comment illustrates nicely one of the contradictions at the heart of the Trump presidency. A strong dollar was one of his policy platforms prior to his election, and as recently as six months ago the president, in an interview with CNBC, said that the dollar would get ‘stronger and stronger’. The previous April, the president had said he was worried about a strong dollar. Now he appears to have gone back to his earlier position, reasoning that a stronger dollar will hurt American exports, and that other countries were keeping their currencies artificially low.

While it seems worrying for investors that the Fed has become the latest US agency to receive criticism from the president, the relationship between the Fed and the White House has not entirely been a bed of roses in the past 100 years. President Trump once criticised the entire Fed committee, while former US president, Lyndon B. Johnson, once held his Fed chairman up against a wall during a disagreement on the path of interest rates.

This takes us down a difficult path – while the Fed is meant to be strictly apolitical, and usually is, its policy decisions do ultimately have an effect on the economy. As Bill Clinton understood, all political questions eventually come back to the economy and how voters view their chances. Trump is aware of this, and for an administration that has tied its success so closely to, not just the economy, but the stock market as well, the Fed’s policy will provoke some disquiet. 

Earnings season may reflect this as well. A stronger dollar will likely crop up more and more in earnings calls, as companies worry about competing overseas. Key firms like Halliburton and Apple will be ones to watch, and it is likely that the currency will get much more airtime in these calls than trade wars.

The bottom line is that the Fed plans to continue gradually raising rates, and potentially increasing the speed of its hiking further down the road. A total of four hikes looks likely for this year, and if the pace picks up yet further, then the dollar may see more inflows. A further consideration will be the actions of other central banks; the European Central Bank’s (ECB’s) talk of a rate rise by the end of summer 2019 is an awfully long way off. Meanwhile the Bank of Japan’s (BoJ’s) hawkish phase seems to have passed, and it is very unclear whether the Bank of England (BoE) will go for a hike in August. Even if these three did tighten policy slightly, they will move gradually, as the Fed did when it first hiked rates. The gap in policy between the Fed and the rest may well therefore widen, not narrow.

The dollar’s resurgency may be only just beginning, and that means we could see more disagreements between the Fed and the White House.

Federal Reserve meeting

Everything you need to know about the Federal Reserve’s FOMC announcement – including when it is, and why it’s important.

Denna information har sammanställts av IG, ett handelsnamn för IG Markets Limited. Utöver friskrivningen nedan innehåller materialet på denna sida inte ett fastställande av våra handelspriser, eller ett erbjudande om en transaktion i ett finansiellt instrument. IG accepterar inget ansvar för eventuella åtgärder som görs eller inte görs baserat på detta material eller för de följder detta kan få. Inga garantier ges för riktigheten eller fullständigheten av denna information. Någon person som agerar på informationen gör det således på egen risk. Materialet tar inte hänsyn till specifika placeringsmål, ekonomiska situationer och behov av någon specifik person som får ta del av detta. Det har inte upprättats i enlighet med rättsliga krav som ställs för att främja oberoende investeringsanalyser utan skall betraktas som marknadsföringsmaterial. Se fullständig friskrivning och kvartalsvis sammanfattning.

Artiklar av våra analytiker

CFD-kontrakt är komplexa instrument som innebär stor risk för snabba förluster på grund av hävstången. 76 % av alla icke-professionella kunder förlorar pengar på CFD-handel hos den här leverantören. Du bör tänka efter om du har råd med den stora risken för att förlora dina pengar. Optioner är komplexa finansiella instrument och du riskerar ditt kapital. Förluster kan ske extremt snabbt. CFD-kontrakt är komplexa instrument som innebär stor risk för snabba förluster på grund av hävstången.