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The world awoke to a new political and economic regime on Jan. 20 as Donald J. Trump took the reins of power from Barack Obama and announced a populist, America-first agenda. Mr. Trump enters the White House with a 37% approval rating while Mr. Obama never saw lower than a 38% approval rating (and entered with a 70% rating). Perhaps this is why investors are taking a measured view of their new president after pushing stocks sharply higher in the weeks following the election. The U.S. stock market plateaued last week, with the Dow Jones Industrial Average falling 58.48 points, or 0.3%, to close short of the 20,000 mark at 19,827.25. The S&P 500 dropped 0.1% to 2,271.31, and the Nasdaq Composite Index lost 0.2% to end the week at 5,555.33. Ten-year Treasury yields rose slightly to 2.47%. The initial repricing of financial assets triggered by Mr. Trump's election may be over.
The most significant market move occurred in the U.S. dollar last week, which dropped sharply after then President-elect Trump told The Wall Street Journal that the dollar is "too strong." After these comments, the U.S. Dollar Index (DXY) fell sharply to 100.81, giving up a significant portion of its post-election gains.
This first assault on the dollar might be just the beginning.
In the coming months, President Trump could very well reverse the dollar's rally completely – and he may do it on purpose.
Trump's Iconoclastic Approach Could Stimulate U.S. Growth
Mr. Trump's denigration of the dollar forces us to question whether the dollar will continue to rally as many assumed. On a fundamental basis, the case for a strong dollar is compelling. Europe and Japan desperately need to cheapen their currencies in order to better compete in the global economy. And Brexit significantly weakened the British pound, which traded below $1.20 last week before rallying back to end the week at $1.2375. But fundamentals can be – excuse the term – trumped by policies designed to weaken the dollar to stimulate trade and help American workers.
A strong dollar is inconsistent with Mr. Trump's desire to stimulate U.S. growth and help American workers, so it is entirely possible that Mr. Trump will not only keep talking the dollar down, but take substantive policy steps to weaken it. There is no reason to think that his comment to the Journal will be his last on the currency that Treasury Secretary John Connally told the world in 1971 was "our currency, but your problem."
A strong dollar is a meaningful headwind for corporate earnings since U.S. companies earn a significant amount of money overseas. If the dollar doesn't strengthen much further, this could provide an unexpected boost to corporate earnings and benefit stock prices. A weaker dollar also relieves pressure on emerging market borrowers who went on a dollar borrowing spree after the financial crisis.
While it is too soon to be sure, Mr. Trump may have thrown a wren…
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Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.