How Is Political Chaos Hurting the Dollar?

The fundamentals that drive the strength of a currency include the political and monetary policy of a country. They include the strength of the economy, balance of payments and interest rates. The US economy has climbed out of the Great Recession and unemployment is at historic lows. The stock market just keeps going up. But the dollar is headed the other way and is at an 11 month low. A major factor in the lowering dollar is perception of the direction of the US government and in fact the competence of its leaders. Here we discuss how political chaos is hurting the dollar. The Financial Times discusses further weakness for the dollar.

Measured against its main rivals, led by the euro, the dollar index has depreciated more than 9 per cent in 2017, and it is within sight of breaking down to a level last seen at the start of 2015. That represents quite a reversal, given how the dollar began 2017 at a 14-year high and the Federal Reserve has tightened overnight borrowing costs twice so far this year.

Despite a substantial interest-rate gap in favor of the US over Europe, UK and Japan, the dollar has slipped. This suggests that other forces are influencing sentiment, namely the political turmoil surrounding the Trump administration and lack of fiscal stimulus out of Washington.

Trump likes to surround himself with other billionaires and with generals. If the slide of the dollar is any guide the opinion of the Forex market is that the generals can’t save us from Trump, a sentiment echoed in The New York Times.

During a recent conference in Singapore, someone asked Secretary of Defense James Mattis whether, given President Trump’s withdrawal from the Trans-Pacific Partnership and the Paris climate agreement, we were “present at the destruction” of the America-led postwar order. In a twist on a remark by Abba Eban (often attributed to Churchill), the former general answered: “Bear with us. Once we have exhausted all possible alternatives, the Americans will do the right thing.”

It was vintage Mattis: witty, learned and confident in his country’s future. But it was also dispiriting, suggesting that he disagreed with President Trump, but was unable to do much about it.

People have been hopeful that once Trump sat down in the oval office he would come to realize how much help he needs to do the job. And the hope continued in the belief that the generals surrounding Trump would guide him along a rational path beneficial to the country and the Western Alliance. That does not appear to be happening as world leaders, and Forex traders, parse the president’s random tweets and worry that chaos will ensue. The US dollar is a victim of this situation.

Worry about a Legal End to the Chaos

While those who hate Trump want him out of the White House at any cost there is valid concern that a legal end to the Trump chaos either from Mueller’s investigation or action by congress would fracture the country for years. None this is helped as Trump stacks the deck against himself. CNN reports the story.

President Trump is a defense lawyer’s worst nightmare — and a dream defendant for special counsel Robert Mueller. Revelations the President may have personally dictated a misleading statement given to The New York Times about his son’s meeting with a Russian lawyer is the latest example why.

Despite the President’s vexation at Mueller’s investigation into possible ties between his campaign and Russia — as well as the possibility that Mueller could pursue obstruction of justice charges against him personally — Trump has not learned that the best way to slow Mueller down is to stop making the case for him.

As this drama plays out we can expect that the political chaos will continue to hurt the US dollar no matter what other factors come into play.