Big market themes often age badly. Ask anyone who tried to chase sterling under $1.20 after the EU vote. But the way the Trump trade has switched from an outright positive for the dollar to an outright negative is quite something.
Investors and analysts — some with glee, others with pinched noses — leapt into Donald’s dollar after last year’s election, looking beyond his social views and personal traits to brace for tax cuts, a splurge of spending and a burst of Trumpflation.
Now, not only has that all failed, but the president and his entourage appear to be helping push the buck down. Is that an over-reaction to political noise? Maybe, but that does not matter to the market. “The dollar is fundamentally overvalued and depends on flows from international investors,” says Paul Donovan at UBS Wealth Management. “International investors tend to understand domestic political risks less than domestic investors, and therefore tend to overreact to political change.”
The dollar index, which tracks its value against a basket of peers, has fully wiped out its rally, and is now down at its weakest point since last June. Remember those 14-year highs? No, nor does anyone else. Meanwhile, the euro is up at its highest level since 2015, cracking above $1.17. The latest survey of German business confidence from the Ifo think-tank reads like something straight out of a North Korean propaganda handbook. Businesses have moved beyond being “jubilant” to being “euphoric”. The economy is “powering ahead”. So much for their supposed reliance on a weak currency. Make Germany Great Again.
It was not just Trump who pumped the dollar up, of course, and he is not denting it single-handedly either. Still, with inflation soggy, dollar bulls are giving up in herds. While it is not expecting a “sharp devaluation”, Deutsche Bank reckons the buck’s day in the sun is over. The euro is heading to $1.20, it says. BNP Paribas has binned its call for another rise in US interest rates this year, and trimmed its expected tally for next year from four to three. It has scrapped its forecast for the euro to swoon down to $1.04.
Support from the rates outlook is wilting. The politics are unhelpful. It is not hard to imagine this escalating.