Macroscope | Plunging dollar reveals market’s anxiety about Trumponomics

For the US dollar, the past seven months have been a tale of two halves.

Following the unexpected victory of Donald Trump in the US presidential election in November, the greenback surged as international investors positioned themselves for a period of faster growth and inflation based on expectations that Trump’s pro-business policies would easily pass through a Republican-dominated Congress.

Yet after hitting a 14-year high in early January, the dollar index, a gauge of the greenback’s performance against a basket of other currencies, began to fall sharply, mainly because of mounting concerns about Trump’s ability to push through his pro-growth agenda, but also, more recently, because of weaker-than-expected economic data.

On Tuesday, the index fell to its lowest level since early October as investors questioned the scope for a further tightening in US monetary policy. While the Federal Reserve is still expected to raise interest rates again at its policy meeting next week, the renewed decline in inflation and waning confidence in Trump’s presidency are weighing heavily on the dollar.

After shooting up 5.5 per cent in the eight weeks following Trump’s victory on November 8, the index has since fallen 6.5 per cent, with more than two-thirds of the decline occurring since early April when Trump’s political woes deepened.

The plunge in the greenback, moreover, reveals a lot about the current state of sentiment in financial markets, both in developed and developing economies.