Tags: US | Political | Risk | European Union

US Faces More Political Risk Than European Union

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Thursday, 23 Mar 2017 06:20 AM Current | Bio | Archive

Financial markets seem to have finally realized that quite a lot has to happen to turn a tweet into law.

The uncertainty about if Congress will indeed pass the Trumpcare healthcare bill or not is raising questions about the ability of President Donald Trump to convert other parts of his Twitter feeds into legal reality.

The Trumpcare bill was supposed to be on the president’s desk by mid-April, which would have allowed time to move ahead with other economically relevant legislation.

However, the opposition to the bill seems to have continued in spite of Trump’s warning to House Republicans to “pass it or you will be fired.”

Of course, constitutional terms of conditions apply.

It’s a fact that U.S. political uncertainty is something that makes the dollar vulnerable because the dollar is dependent on international investor flows in order to finance the current account deficit. This gives a bias to politically-inspired dollar weakness.

For any investor, it is worth taking note that international investors are more prone to overreact on the dollar because of U.S. political risk than are U.S. domestic investors, who are less prone to overreact on the dollar because of their own domestic political issues.

This is nothing new and is in fact the case for many markets, but not for all.

The value of a currency like the euro is determined, on the contrary, by domestic investors, who are less prone to overreact on the value of the euro because of their own political issues.

Thus, although there may be more political events in the European Union (EU) this year, from a market perspective, there may be more political risk with the United States and that’s a point US investors could do well to keep in mind.

Meanwhile, Loretta Mester, the president of the Cleveland Fed, in a prepared speech said the current organic tightening of quantitative policy could be expanded to a passive tightening as early as this year.

This would accelerate the existing pace of decline of the Federal Reserve’s balance sheet to GDP ratio.

The prospect of quantitative policy tightening might be the unknown variable with the Federal Reserve for the immediate future. The path for monetary policy tightening is set out with expectations of interest rate increases being largely validated by members of the Fed, but on quantitative tightening could be used as an additional means of controlling the rising inflation in the United States.

This is by no means certain, of course. Robert Kaplan, the president of the Dallas Fed, was suggesting no urgency in accelerating the quantitative tightening process by saying: "I think we are moving toward a period where we should begin allowing the balance sheet to gradually and patiently run off."

Elsewhere, we saw a surprising narrowing of the current account deficit for the 4th quarter of last year. However, the narrowing of current account deficit has nothing really to do with trade.

Nevertheless, the current political climate in the United States suggests that the current account data will become more important, not because it is more important of itself, but because it’s driving policy behavior that has the potential to be economically significant.

Finally, the Italians have suggested that the forthcoming G-7 summit on May 26-27 should issue a rejection of trade protectionism.

As the United States is a member of the G-7, at least for the moment, that might make for a somewhat tense summit meeting.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Thus, although there may be more political events in the European Union (EU) this year, from a market perspective, there may be more political risk with the United States and that’s a point US investors could do well to keep in mind.
US, Political, Risk, European Union
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2017-20-23
Thursday, 23 Mar 2017 06:20 AM
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