What Trump's presidential inauguration means for the US Dollar

 
Tanya Uniacke
Washington DC Prepares For Presidential Inauguration
Washington DC Prepares For Presidential Inauguration (Source: Getty)

Thanks to the Federal Reserve's Janet Yellen confirming that US rates are going up, the Greenback was the best performing currency on Wednesday, netting half a cent against sterling.

She was unremittingly upbeat about the US economy, saying it was "near maximum employment and inflation is moving toward our goal". That being the case, the Fed is expecting to increase the federal funds rate "a few times a year".

However, it’s not all rosy. Earlier in the week, China's president Xi Jinping delivered a speech to the World Economic Forum and the market picked up belatedly on comments made by America's president-elect Donald Trump during an interview. The former was of potentially strategic significance: the latter rang alarm bells for the market. At the end of last year investors bought into the idea of Trumponomics; tax cuts and infrastructure spending. More recently they have been faced with the less acceptable face of Trumpolitics; swinging import taxes and naked threats to car manufacturers. The latter could trump the former when Donald takes the helm.

As Mr Trump was framing his plans to pull down the shutters on America's trade agreements Mr Xi was making a statesmanlike case for globalisation and free markets. He said "protectionism is like locking oneself in a dark room" and "no one will emerge as a winner in a trade war". It is intriguing that communist China could replace the United States as the global champion of free trade.

At the weekend, in the context of a discussion about a new "border adjustment" tax, Mr Trump said the dollar was already "too strong". His comment appears to signify the end of a two-decades-old "strong dollar" policy. Be prepared for his tweets to generate volatility for the dollar in coming months and years.

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