Donald Trump has become the soft-dollar president, with the US currency hitting the lowest level in more than a year on Thursday, measured against a basket of foreign alternatives.
The dollar has lost a tenth of its value on that basis since early January, largely because of a surge in the European single currency. Americans in Paris pay as much as 14 per cent more for each euro compared with early in the new year.
To attempt to answer the question of where the dollar goes from here requires coming up with an explanation for the drop so far, however, and a few reasons present themselves.
The most obvious might be monetary policy. Thursday’s fall followed a statement from the Federal Reserve that suggested the US central bank has been surprised by the continued weakness of inflation. Less need to fight inflation ultimately means less chance of higher bond yields and the capital inflows they attract.
Yet expectations for a third interest rate rise this year are little changed from January, with money market prices implying a roughly 50-50 chance.
Katie Nixon, chief investment officer for Northern Trust Wealth Management, says: “US investors focus on the weakness in the dollar and wonder why, amid a strong economy and a Fed on the move, the greenback is falling. However, the recent weakness is more a function of a strengthening euro.”
Currency markets have moved faster than bond markets, she says. With economic data showing improvement across the euro area, and a more hawkish tone from central bankers in recent weeks, traders have been consumed by speculation about when and how the European Central Bank begins to remove emergency policy measures.
Many expect an announcement of tapering, a reduction in the monthly pace of bond buying, as soon as September.
Stephen Gallo, currency strategist for BMO Financial, says: “If the ECB pushes the decision out another couple of months before it talks about a taper, the euro is going to sell off pretty hard.”
A rival explanation for a weaker dollar, however, is politics: the failure of Mr Trump’s party to enact his legislative priorities, with the latest attempt to deliver on a campaign promise to repeal Obamacare foundering.
On Wednesday seven dissident Republicans voted down a plan to repeal the Affordable Care Act and find a replacement later, less than 24 hours after senators rejected an alternative bill to impose a new system for medical insurance.
Mihir Kapadia, head of Sun Global Investments, says: “The American healthcare reform bill is effectively dead in its current form, casting a cloud on President Donald Trump’s broader economic revitalisation and reform agenda.” Anticipation of the boost such policies would bring had powered markets after Republicans gained full control of government in November’s election.
Mr Gallo says a diminished set of tax reforms could yet weaken the dollar. Some of the more ambitious changes considered early this year, such as a move to encourage repatriation of offshore corporate profits, or a border adjustment tax, might have boosted the US currency.
Simple tax cuts that expand the deficit are likely to have the reverse effect, he says, and he predicts the dollar will fall another 4 per cent to 5 per cent over the next year.
Others focus on flows of money as the cause. Michael Howell of the Cross Border Capital research group, puts the shift this year into a bigger context: “Look where we’ve started from. There have been huge inflows into US markets over the last three or four years.”
About $1.5tn left China, and a similar amount of capital moved out of Europe, with much of it going to the US, he says, arguing that about 50 cents of every euro printed by the ECB found its way into US markets.
Improvements in the European economy, as well as greater political stability following the election of Emmanuel Macron to the French presidency, may encourage money to return to Europe. Higher bond yields as the ECB starts to normalise monetary policy will also be an attraction.
Indeed, the great dollar run of recent years started in mid-2014, at a time when the ECB started to discuss the possibility of a bond-buying programme, and the euro was almost a fifth higher than today.
“You’ve got a recipe here for a significant reversal in currencies,” adds Mr Howell.