Trump's health care bill fails, but dollar hits its target

US President Donald Trump said earlier this year that he would like the dollar to be a little lower in view of the competitive position of American business. Due to the failure of the attempt to get his health care law through the House of Representatives, he does get his way on the currency front.

Shortly after Trump called off the vote on his new health care bill on March 24, the dollar plunged against the euro to its lowest level in more than four months. Trump withdrew his proposal at the last minute. It turned out that the proposal could not count on sufficient support within his own republican party. This remarkable move led to a strong reaction in other markets as well as in the currency world. The US S&P 500 stock index fell more than 1 percent in one trading day for the first time in five months.

Bad omen
The shock in financial markets is caused by the signal that this remarkable move sends. The failure raises at least one question: "Will Trump soon be able to get the support of his party members in the House of Representatives to carry out his other plans, such as lowering taxes and boosting infrastructure investment?" Many parties had already taken out a considerable advance, as witnessed by the advance of the dollar and the rise in American stock prices. Traders and investors may need to adjust the expected growth acceleration in the United States.

Words and deeds
Trump's appointment at the end of January already marked the start of a significant decline in the dollar. The dollar hit its lowest level since the November presidential election on Monday. The dollar came under pressure, among other things, as a result of his statements. Trump said the expensive dollar would come at the expense of US exports. Plans to protect local businesses through tariffs also fueled fears of a trade war. Trump's rhetoric has eased somewhat since then, but the dollar is still under pressure. There are also other reasons for this, in addition to Trump's policy.

Caution at Fed
The US central bank (Fed) raised interest rates by 0,25 percent in mid-March. That was the third increase in a year and a half. Rising interest rates usually lead to a rise in the currency. This is logical because it becomes more attractive for parties to hold their assets in this currency. This time, the dollar actually lost some ground against the euro and other currencies. That had everything to do with Fed Chair Janet Yellen's speech on the interest rate decision. This showed that interest rates will rise a lot less quickly in the coming period than traders had expected.

ECB on the move
On the other side of the ocean, the economy is booming in several European countries. In the current year, countries such as the Netherlands and Germany are heading for growth of more than 2 percent. In addition, inflation on the continent is steadily rising towards 2 percent. ECB board member Ewald Nowotny hinted recently that it is time to wind down stimulus measures and start raising interest rates again.

No Nexit or Frexit
Another factor influencing the direction of the exchange rate is the political uncertainty in Europe. The dollar is a safe haven in currency markets. The growing strength of the populist movement was one of the factors driving demand for dollars in the second half of last year. Financial markets explicitly took into account the possibility that a party would come to power in a large European country that, following the lead of Great Britain, is striving to leave the EU. After the elections to the House of Representatives in the Netherlands and the first debate before the French presidential elections, that fear has partly ebbed away.

Currency risk
Developments indicate that the advance of the dollar against the euro may come to a halt for a while. However, the past year, with the Brexit referendum and the US elections, has shown how dangerous it is to blindly rely on the most obvious scenario. It is also very difficult for an entrepreneur to get an idea of ​​which forces influence the euro/dollar exchange rate. This energy can almost always be better invested in the growth of one's own company and to hedge the dollar risk where (possible and necessary) with instruments such as currency options and forward contracts. This protects you against negative exchange rate movements. 

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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