How global events, and President Trump’s next move, affect the almighty dollar.
There’s a three-day extension on the deadline for filing US tax returns in 2017, but don’t mistake this for leniency on the part of the IRS. (The usual deadline of April 15 falls on a Saturday, and Monday April 17 is a public holiday, Emancipation Day, in Washington D.C.) The time leading up to any end-of-year tax return is a period of reflection and projection, but this year in particular, there is much to consider for those reporting in dollars.
“The dollar remains strong,” says FJ Eigelaar, head of Private Client FX Dealing at Investec. In March, the Federal Reserve raised interest rates. When a rate hike is announced, there is something called a dot plot, which shows the interest rate hike expectations of each of the 16 Fed members. The dot plot suggests there is definitely a chance of two or three more rate hikes this year. Regardless, rate hikes strengthen the US dollar. Investors can buy US Treasury bills and bonds, a lower-risk investment, and rate hikes make them more attractive.
“Also, on April 7, the monthly nonfarm payroll numbers are announced. These US employment figures are very important, indicative of the strength of the economy and drive the Fed members’ thinking around rate hikes. A stronger payroll number will increase sentiment towards a second rate hike this year.”
Whatever people think of him, President Trump is more a business than a politician, and that bodes well for value of the dollar
Looking further ahead, Eigelaar sees global events that will affect the dollar, such as the French presidential and German federal elections, which begin on April 23 and September 24 respectively, and the opening salvos of two-year-long Brexit negotiations. “If anti-establishment sentiment reaches the level of government in France and Germany, as it did in the US elections and with Brexit, uncertainty is added to markets,” he says. “Even something like North Korea releasing propaganda videos of US military targets being destroyed leads to uncertainty. And when uncertainty comes through, investors flock to the US dollar, making what’s known as the ‘safe haven trade’, investing in the US Treasury and strengthening the dollar. This shows no sign of abating.
“President Trump is likely to remain a big story,” Eigelaar continues. “He seems to prefer Twitter as his method of communication; markets react on the back of that. But it does seem like the markets are already becoming numb towards his tweets. Ultimately, what we want to see is how he will change fiscal policy and how he’s going to drive and create the investment in infrastructure. One of the main selling points in his election campaign was more jobs for blue-collar workers. We want to see how he’s going to support that, what he’s going to put in place in government to lead to more jobs.
“With interest rates going higher, and US Treasury bonds and bills being more attractive, he shouldn’t have a problem finding the funds to make the improvements, but he needs to follow through on that and drive US economy growth via higher employment figures. Whatever people think of him, President Trump is more a businessman than a politician, boding well for the economy, but approval of his plans rest on agreement from Congress and as we saw last Friday (24th March) that cannot be taken for granted.
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