A Volatile Market with Unexpected Growth
While many factors influence the performance of a nation’s currency, nothing stirs up currency volatility quite like political uncertainty. Yet the last two weeks of 2016 have reminded us of the number one rule of the markets - there is no such thing as a sure thing. Donald Trump’s White House victory has shaken up the foreign currency market in a way most economists were not predicting. The US dollar is performing with unexpected strength, in a direct contradiction to what many economists predicted, that a Trump win would weaken the dollar. The United Kingdom’s Sterling (GBP) has benefited from the American election as well, but the Euro looks like it might be in trouble.
USD - The Dark Horse
In the days since President Elect Donald Trump’s victory in the American election, the foreign currency market has been an unpredictable place.
The initial announcement of Trump’s stunning and unexpected presidential win initially caused the US dollar to lose value, but it has quickly recovered. Though political uncertainty tends to negatively affect a country’s currency, Donald Trump’s reputation for supporting businesses has left many investors and traders optimistic and anticipating a foreign market with looser regulations and a more lenient fiscal policy. The natural counterpart to this would be greater consumer spending in the short term, causing inflation of the US dollar. As a result of this spending, investors believe that interest rates will rise and create a strong US dollar, thus the strong performance of the US dollar today.
The US dollar’s performance is not all a reaction to Trump. US housing data and jobless claims data were reported yesterday, giving investors more faith in the US dollar. Additionally, Federal Reserve Chair Janet Yellen suggested an impending interest rate increase next month. All of these factors together have resulted in the US dollar outperforming other foreign currencies, reaching its highest value since 2003.
Euro Sinking
The Euro has fallen 4% to the dollar in the past fourteen days. This downward trend has caused many investors to speculate that USD and Euro may eventually reach parity, meaning the two currencies would have equal buying power. A parity between USD and Euro has never occurred, with the Euro consistently outperforming the US dollar since its introduction to global markets in 1999.
Many global events have affected the performance of the Euro in the past months. The United Kingdom’s pending departure from the European Union has left many investors nervous, as the fallout is still yet to be seen. Further harming the Euro is the rise of Donald Trump’s populist movement, causing many investors to speculate a ripple effect, with isolationist policies becoming the norm in other European nations, perhaps putting the European Union at risk of losing members beyond the United Kingdom.
That’s not all investors have to be nervous about. The citizens of Italy will vote on their own referendum regarding reforming the Italian constitution on December 4th, 2016. Prime Minister of Italy, Matteo Renzi, has promised to resign from his position should Italian citizens choose not to reform. Italy is the third largest economy in the Eurozone, and potential political upheaval in the country has led investors to be wary of the Euro.
Pound - America’s Gains Good for United Kingdom
As many investors see the possibility of strong, rising populist movements, the Euro sinks, but the pound is slowly gaining momentum. Much like the surprising performance of the US dollar in the last two weeks, while the pound still remains at a low since Brexit, it had its biggest gain in the night of Donald Trump’s win. The gain, the biggest in over eight years, was .75% against the Euro.
Now over their initial shock from Brexit, investors are starting to place their trust back in the pound, with many speculating that a full recovery is inevitable. Investors and traders believe that Donald Trump’s win will bolster the United Kingdom’s economy, with England the obvious first choice for a newly negotiated trade deal with the United States.
