The US dollar greeted the election of Donald Trump as President with a surge to its highest point in 13 years. Half a year later, the dollar is back where it started.
Here’s what happened in between.
1. Election rollercoaster
Whether they wanted Trump to win or not, markets were not prepared for what was coming. Polls predicted Trump’s Democratic rival, Hillary Clinton, would win comfortably – although the margin of error did allow for a Trump victory.
As Trump’s victory became clear the dollar lurched lower, but the biggest drama was yet to come, as traders started to price in the the policies Trump had promised.
The dollar’s surge came because of Trump’s promises to spend a trillion dollars on infrastructure while cutting taxes at the same time. A week after the election result the dollar broke through to 13-year highs.
While the Republican party has made the classic supply side argument that tax cuts for the wealthy will pay for themselves by boosting growth (and therefore tax receipts) most economists and investors guessed the combination would result in a big fiscal expansion and inflation: "Trumpflation" was born.
Higher government spending would also boost the private sector in classic Keynesian style. American indices have duly hit fresh record highs with almost tiring regularity.
3. The path to normalisation
The other crucial upshot of fiscal expansion would be tighter monetary policy. An improving US economy meant the US Federal Reserve was already on the long road towards higher interest rates, starting with the first hike since before the financial crisis in December 2015.
If anything, Trump’s ascent to President will hasten this cycle. The dollar rose sharply on 14 December 2016 when Fed chair Janet Yellen raised interest rates further, saying it was a “vote of confidence” in the US economy.
Higher interest rates generally strengthen a country’s currency, as investor demand for dollar-denominated assets increases.
4. Talking down
Yet Trump has an avowed preference for a weaker dollar, despite decades of strong dollar policy from the White House.
A stronger dollar means imports to feed the voracious American consumer are cheaper, but the flip side is a disadvantage for the US exporters in the manufacturing sector Trump promised to help.
Trump’s theory comes second-hand from his trade adviser, Peter Navarro, who has been heavily critical of Germany, saying it exploits the weakness of the euro. When both of them talked down the dollar it drove the greenback to its worst January in more than three decades.
5. The health of the Trump administration
The dollar recovered as Federal Reserve officials continued to talk about rate hikes. The next came on 15 March, but a more cautious outlook from Yellen put further pressure on the dollar, as investors re-evaluated expectations of a quick tightening cycle.
Those questions were only deepened when the administration’s healthcare bill failed to pass through Congress after hostility from within Trump’s own Republican party – as well as unanimous opposition from the rival Democrats.
The market impact of the healthcare bill’s collapse were negligible; the political implications of the failure one of the President’s signature campaign pledges were profound. The dollar sank to November lows (and US stocks suffered) as investors finally began to doubt the novice President’s ability to actually pass the massive tax-cutting and expenditure-boosting legislation he had promised.
6. Bother Russia
The final leg down came from a story that had been bubbling in the background throughout Trump’s fledgling Presidency: the campaign’s links to Russia. The White House faced its biggest crisis yet in May as the President fired James Comey as head of the Federal Bureau of Investigation (FBI).
Trump’s direct intervention in a probe targeting his own campaign shocked Washington, and finally made investors take note of the political chaos enveloping the White House.
With Democrats openly talking of impeaching the President barely six months after his election the prospects for the bipartisan support needed for an ambitious tax plan are limited.
Trump remains unlikely to be thrown from office, but with the White House fighting political battles on multiple fronts it seems that dollar bulls searching for a bright side will have to look to the Federal Reserve once more.