Trump Weakening Dollar as the Pound Feels Pinch
Headlines across the UK are trumpeting the news of Commons Speaker John Bercow’s unprecedented banning of US President Trump from addressing Parliament during his planned state visit. MPs applauded Bercow’s statements opposing Trump’s “racism and sexism”, as he made it clear he wouldn’t agree to permitting an address. One of 3 “key holders” to Westminster Hall, along with Lord Fowler and Lord Great Chamberlain, the trio must all agree to Trump giving an address before it can take place.
Bercow’s critics say he’s spoken out of turn, with remarks “way beyond what is acceptable.” The Prime Minister’s efforts to create a new special relationship between the UK and the US are already at stake only weeks after their first meeting. On February 20th, Parliament will debate the petition (signed by over 1.8million people) started by lawyer Graham Guest who claimed Trump’s visit shouldn’t be allowed because “it would cause embarrassment” to the Queen.
Special relationship between currencies
It’s still early to say whether Parliament might be listening to Trump address them in future, however, it’s unlikely his words would have much of an impact. Certainly, not the force they’ve had regarding the dollar. President Trump might not be getting his wish to meet the Queen, although his wish of having a weaker dollar is coming true.
That’s something the US and the UK have in common: Weakened currencies due to politics. Inflation, the first real impact of Brexit, is now being felt in the UK. Cautious consumers trimmed their High Street spending to levels not seen since the 2009 financial crisis. The British Retail Consortium report on January spending indicated that decreasing sales were due to the rise in prices. With the pound having fallen by about 17% against the dollar since the referendum vote, the costs of imports is rising and being passed on to shoppers who are making do without.
Americans can expect the same increase in inflation and reduction in spending if the dollar decreases. Trump felt that a weaker dollar would have a positive effect on exports, which, in turn, he said, would increase employment. The market reaction to his election was a strengthened greenback on expectation that his policies would grow the US economy. In reaction to Trump’s “erratic” first week’s policies, strategists at J.P. Morgan are suggesting shorting the dollar against Swiss franc and yen.
The myth of a beneficial weaker currency?
Trump’s bemoaned the US dollar being “too strong”, especially compared to the Chinese yuan, saying “Our companies can’t compete with them now.” That statement had the instantaneous effect of reducing the dollar which US policymakers have traditionally sought to keep strong. With a strong dollar, consumers purchase more inexpensive imports and foreign investors find the country a good risk. Cheaper borrowing rates make houses more affordable, supporting a key aspect of the economy and a sector where job growth is an important indicator of economic well-being. Presumably, these would be sacrificed as trade-offs for increasing exports. But would the benefits of a weaker dollar outweigh the consequences of a weak currency?
What we’re seeing in the UK is that weaker sterling isn’t necessarily helpful for exporters because, in a global marketplace, currency fluctuation is a double-edged sword hurting as many businesses as it helps. A report by the British Chambers of Commerce (BCC) found that a weak pound was especially difficult for small to medium sized firms that rely on imports. The BCC’s report said that nearly half of the companies surveyed didn’t manage currency risk and had no future plan to put a strategy in place. This is remarkable when you consider that the report also said that 22% of the firms blamed currency weakness for profit loss. Also, the orders didn’t flood in: Only 25% of the companies surveyed said that sterling’s weakness had increased their export levels.
UK Inflation Rising Cuts Spending
Official December inflation rates revealed that UK costs had increased at the highest rates in 2 ½ years, due to the drop in the pound’s value. The 1.6% rate was higher than the 1.4% predicted as the price of fuel, food and air fares were all up from 1.25% in November. Clearly, if prices keep increasing at this rate in 2017, family finances are going to be sorely squeezed. Apple just put prices up by nearly 25% on its UK app store to keep up profit margins after the pound’s depreciation.
The Joseph Rowntree Foundation has said that brunt of these rising costs will be felt by lower- income families. The charity reported that “People in the bottom 5th of the income scale typically spend £1 in every £6 on food, compared with £1 in every £12 for the richest 5th.” Since consumer spending drives growth, this decrease in spending shrinks the economy. Ironically, it makes life more difficult for the most vulnerable-those who voted for change imagining they’d end up with more of it in their pockets, presumably.
So, the obvious question for Trump’s simplistic economic plan is how his reducing the dollar will manage to benefit middle class Americans. Won’t increasing inflation cut spending, just as it has in the UK?
Dollar Predicted to Ignore Trump’s Tweets
A recent Reuters poll of over 60 foreign exchange strategists predicted that the dollar will strengthen, once there’s more clarity about Trump’s tax and spending plans. Around 70% of the forecasters said that Trump’s policies would drive global currency markets this year. They were in consensus that the euro would weaken nearly 3% against the dollar and sterling would lose another 1.5% once Brexit negotiations commence.
They’re confident that Trump’s tweets will become the new normal, and the market will largely ignore them. They suggest that the dollar may see an extreme spike or fall “driven more by U.S. President Donald Trump's expected fiscal stimulus than by his words.” They didn’t speculate on what would infuriate Trump more, though. Will Trump throw a bigger tantrum when the dollar disobeys him or will the global market ignoring his “normal temper tantrum” be his undoing?