The dollar was heading for its worst week in more than a year, wiping out all its gains since Donald Trump was elected US president as investors fretted that a growing White House scandal might derail Republican initiatives to boost the economy.
Mr Trump left Washington on Friday for a nine-day foreign tour starting in the Middle East, with political allies hoping his first foray on the international stage will divert attention from mounting allegations that the president improperly attempted to suppress a federal investigation into his campaign’s links to Russia.
The trip begins against a backdrop of rising investor anxiety over the future of his presidency. The index measuring the dollar against its currency peers was heading for a fall over the week of 2 per cent, its biggest drop since April 2016.
“The political outlook has changed considerably over the last couple of weeks,” said Jan Hatzius, chief economist at Goldman Sachs, who cut his forecast for the size of tax cuts over the next 10 years from $1.75tn to $1tn because of reduced chances of a Trump tax reform initiative.
The main beneficiary of market anxiety was the euro, which gained 2.4 per cent on the dollar and was on the cusp of hitting $1.12 for the first time since November, helped by Emmanuel Macron’s victory this month in France’s presidential election, which has taken the sting out of European political risk.
The US currency peaked in early January, just before Mr Trump’s inauguration, and has been a barometer of the so-called Trump trade, which has been driven by expectations of new deregulation, tax cuts and a $1tn infrastructure spending plan.
But the dollar has fallen steadily as the administration endured a series of legislative and legal setbacks, and fell sharply this week after revelations that Mr Trump pressed James Comey, the FBI director, to drop the Russia probe.
A weaker dollar reflects lower expectations of a significantly stronger US economy that would in turn reduce the pace of interest rate increases from the Federal Reserve.
Investors said the justice department’s decision on Wednesday to appoint a special counsel to run its Russia investigation was particularly unsettling.
Kit Juckes, forex analyst at Société Générale, said investors feared Mr Trump’s domestic problems would “gridlock” Washington’s legislative process “and further reduce the chances of meaningful policy changes being enacted”.
Marc Chandler, a strategist at Brown Brothers Harriman, said investors were also concerned that Mr Trump’s inexperienced team would be unable to fight off the investigation and steer legislation through Congress.
The dollar’s weakness provided a boost for Wall Street on Friday as share prices continued recovering from their worst one-day slump in eight months on Wednesday. A weaker dollar boosts foreign revenues for US multinationals.
Although US equities also fell after the Comey revelations, the S&P 500 pared back this week’s decline to just 0.2 per cent by midday in New York, thanks to a strong bounce at the end of the week.
However, analysts are concerned that lofty valuations for US equities and the fading prospects for fiscal stimulus could prompt investors to pull more money from Wall Street and seek better opportunities in Europe, putting further pressure on the dollar.
US stock funds recorded an outflow of $8.9bn in the week to May 17, the seventh week of withdrawals in the past nine, EPFR data showed.
Additional reporting by Robin Wigglesworth in New York