Lack of Certainty in Washington Hurts the Dollar

The Trump administration treats policy decisions like promotions for the Trump television show, The Apprentice. With much hoopla an announcement is scheduled and when the day comes the hype disappoints. The markets and the dollar responded to the promise of a stronger economy, more jobs, deregulation, lower taxes, and repatriation of offshore corporate cash. Very little of any of that is happening and the things that have happened are causes for uncertainty. And, lack of certainty in Washington hurts the dollar. Reuters writes that U.S. dollar gains are being held back by lack of clarity on reforms.

The dollar will rise only slightly over the coming year on waning expectations for sweeping tax cuts and several rate rises from the Federal Reserve, according to foreign exchange forecasters who say the risks are skewed more to the downside.

After surging a little over 30 percent over the last five years, the dollar index — which measures the currency’s value against a basket of six major currencies — has fallen more than 5 percent this year.

Growing political tension in Washington over Donald Trump’s presidency has raised worries of delays in the U.S. administration’s efforts to implement sweeping tax cuts, and has pressured the dollar.

The consensus of currency traders is that it is that Trump has a long road ahead of him digging out from scandals and possibly impeachable offenses relating to Russia hacking the election to accomplishment of his campaign promises. He has not demonstrated an ability to work with congress and will likely be an increasingly isolated president. The dollar will be one of the casualties of his continuing problems.

Expectations versus Reality

Business Insider writes that reality never met expectations in regard to Trump, repeal of the Affordable Care Act, tax cuts and the rest.

A united Republican Congress and presidency had increased the odds of fiscal stimulus which, coupled with monetary tightening already underway, created the potential for meaningful fiscal and monetary policy divergence between the United States and other major developed countries. As we explained at the time, such a policy mix was likely to boost the greenback against other major currencies.

Five months later, the dollar has instead fallen 3.8% on a trade-weighted basis.

Trump’s plan was to repeal the Affordable Care Act and replace it with an alternative that would have reduced benefits and greatly reduced the cost to the government. That did not fly. Then the border-adjusted tax was going to help find the money to cut corporate taxes. That also did not fly. In each case a substantial number of Republicans as well as virtually all Democrats opposed these measures and they died. If Trump cannot get the first steps of his plan in place how can he accomplish the rest? And especially how can he go forward without the spending cuts and extra income that his defeated measures would have provided. Now there is no certainty that Trump and his agenda can go forward but there is certainty of investigation by a special prosecutor as well as House and Senate committees into whether or not members of Trump’s team colluded with the Russians to hack the election in Trump’s favor. It will in all likelihood be an uncertain year in Washington and not a good year for the dollar.