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Investors Gamble Over Dollar's Direction Under Trump

Investors Gamble Over Dollar's Direction Under Trump

Tuesday, 24 January 2017 07:10 AM Current | Bio | Archive

In the grand tradition of past U.S. Treasury Secretaries, Treasury Secretary nominee Steven Mnuchin, in a written response to a question from a U.S. Senator about the implications of a hypothetical 25 percent dollar rise said: “The strength of the dollar has historically been tied to the strength of the US economy and the faith that investors have in doing business in America. From time to time, an excessively strong dollar may have negative short-term implications on the economy.”

Unsurprisingly, this has been interpreted in the more sensationalist parts of the media as being a weakening of the strong dollar mantra.

In fact, Mnuchin confirmed nothing more than what already Anthony Scaramucci, a leading figure in President Donald Trump's team said earlier this month at the World Economic Forum in Davos, Switzerland: “We have to be careful about the rising currency because not just what is going on internationally, but it’ll have an impact internally in the US … if you get better than expected growth in the US, even if the dollar is going up, we saw in the 1980s, you can have a strong dollar and fairly robust growth in the US that will lift the global economy”

All that said, maybe it could be helpful for investors to recall:

-          In 2003, then Treasury Secretary John Snow commented on what a strong dollar meant to him: “You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities.” zef.

-          As an investor you should better also not forget that from 2002 to 2012 and notwithstanding all the supportive talk for a strong dollar, the dollar index (DXY) declined by about 39 percent over that period.

RefIn simple words, it is for the moment extremely difficult, if not impossible, to have a good idea where the dollar could go over the near term.

Mnuchin also said: “As Treasury secretary, I will work with the President to examine the US trade relationship with China and assess the damage to the American economy from China’s practice of intervening in currency markets to manipulate the yuan-dollar exchange rate, as well as other unfair tactics that violate free trade principles ... I will ensure that we defend American jobs by combating currency devaluation through legislative processes established by Congress.”

Finally, any investor should also better keep in mind that the U.S. needs $2.7 billion a day from international inflows, which for the time seem being more inclined to be in a wait and see mode.

All that said and after now President Trump said end November in a video message that the U.S. would quit the Trans-Pacific Partnership trade deal on his first day in the White House he simply confirmed what he had already said before and yesterday the United States formally exited the Trans Pacific Trade Partnership. Presidential authority on trade, when it comes to destructive authority is considerable. Trade authority is more constraint.

Meanwhile in the UK, the Supreme Court has just ruled that Prime Minister Theresa May must seek the permission of Parliament, but, and this very important, legislatures in Scotland and Northern Ireland don’t get to vote on the Article 50 process.

The whole debate is a little bit academic as Parliament is going to vote in favor of initiating the exit process. The delay to get the necessary legislation through will probably be minimal and the government remains committed to invoking article 50 of the Lisbon Treaty before the 1st of April.

Sterling did move very little on the news.

Separately and interestingly, there are reports that the UK is preparing to illegally start trade talks with other countries, which it is not supposed to do before it formally has left the European Union.

Of course, breaking the rules in the European Union is a great tradition and the UK has been better behaved in following the rules than many EU countries, so perhaps the government feels that some cheating is now acceptable.

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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It is for the moment extremely difficult, if not impossible, to have a good idea where the dollar could go over the near term.
dollar, investors, trump, direction
Tuesday, 24 January 2017 07:10 AM
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