The US dollar is coming under pressure at the start of the week with swathes of red seen across stock markets around the globe, as doubts continue to grow surrounding the ability of the Trump administration to fulfill their election promises. The FTSE 100 has fallen by 55 points since Friday’s closing level with the pound rising to its highest level since early February against the US dollar.
Fiscal stimulus in growing doubt
Last week’s abandonment of the vote on the Obamacare repeal act came as a crushing blow to US president Donald Trump, with his administration facing its first real test. Trump’s unexpected victory last November sparked an immediate sharp rally in both the buck and shares with an expected large fiscal stimulus package quickly being priced into the markets. More important than the victory for a self proclaimed pro-business president was the fact that with the Republicans in control of both houses, there was a widespread belief that the years of political paralysis that inhibited Obama during his second term were over. However, as is often the case in politics and markets high degrees of certainty amongst the vast majority should serve as a warning sign in what are inherently unpredictable fields. In recent months the jubilation and one-way trade have subsided somewhat, but it wasn’t until last week’s events that the doubts grew to significant levels. With the Trump administration prioritising the overhaul of the healthcare act over the fiscal measures they wish to pass, the defeat takes on even greater significance and beliefs that the promised tax cuts and large scale infrastructure spend will occur in full now look highly optimistic at best and downright fanciful at worst.
Slow puncture or blowout?
Whilst Friday’s developments come as a major blow for Trump and his team, it is yet to be seen how lasting the effects will be. There is not an overwhelming number of politicians needed to come onside to pass the act, and it still remains probable that it was go through Congress and the Senate in some shape or form in the not too distant future. Furthermore, a lack of political support on this doesn’t necessarily imply the same level of opposition to future acts and whilst the notion the Trump can go Carte Blanche with his policies with the backing of both houses has now been dispelled the President remains in a fairly strong position of power. With the US dollar trading at its lowest level against the Euro and the Japanese Yen, the two currencies it is most widely traded against, since the week after Trump’s victory the market is clearly questioning his ability to follow through on his promises. However the nature of the recent declines pale in comparison to the strength seen in the greenback’s run-up and it seems the air is coming out of the US dollar at a fairly orderly rate, with most post-election gains already handed back. US stock markets on the other hand remain not far from the all-time highs seen at the end of last month and should the Trumpflation trade fizzle out, it is here where the fireworks are more likely to occur.