Macroscope | US dollar will win the election, no matter who ends up in the White House
The world’s addiction to dollar-denominated assets, and supportive US domestic policy, will ensure the greenback continues to rise
The dollar should continue on an upward trajectory during the next US president’s term of office, benefiting from what should be dollar-supportive domestic monetary and fiscal conditions and a continuing global addiction to dollar-denominated borrowings, regardless of who actually wins the White House.
That doesn’t preclude any kneejerk post-election selective sell-off in the dollar if markets are taken aback by the result but it means investors might gain by looking through that price action when making longer term decisions.
As Friday’s US jobs data showed, the United States continues to create new jobs at a healthy pace with the unemployment rate at 4.9 per cent and with October’s data showing, in the words of National Australia Bank, a “jump in average earnings” which “marks a cycle high and the highest annual rate since 2009.”
Short term volatility aside, the conditions that support a higher value for the dollar will remain, and may even be enhanced by policies adopted after the US election, regardless of who actually wins
That seems incompatible with the current level of US interest rates. It must surely be more likely than not that the Federal Reserve now hikes rates next month, making the price of servicing dollar debt dearer.
As far back as January 2015 the Bank for International Settlements was writing that “the scale of dollar borrowing outside the US means that US monetary policy is transmitted directly to the rest of the world in several ways. Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans.”
But in truth, the cost of borrowing dollars in the market has already risen appreciably in 2016.
The 3-month dollar London interbank offered rate (Libor), a measure of the effective cost of short-term dollar borrowing in the global system, has tripled this year to some 0.88 per cent, partly driven by regulatory changes affecting US money market funds as well as by markets anticipating the Fed tightening monetary policy.
Chinese banks and firms which borrowed dollars after the Fed slashed rates in the aftermath of the global financial crisis, but where the loan structures linked the cost of repayments to the 3-month dollar Libor rate, will have been affected.