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Is Trump tweeting the dollar down?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Politics does not normally matter to financial markets. The possible exceptions to this are currency markets. Currency markets often have more foreign investors than other asset markets. Politics is an intimate part of a society's culture, and foreigners therefore tend to understand less of a foreign country's politics. Thus, foreign investors tend to overreact to political risk.
  • The United States is a current account deficit nation. The price of a current account deficit currency is driven by the willingness of foreigners to buy the currency. The price of a current account surplus currency is driven by the willingness of domestics to sell the currency. In the last year, the United States needed to attract USD 2.8bn of foreign inflows, every day (that is larger than the Dutch economy). If foreigners slow their flows into the United States, the dollar falls in value.
  • The current political noise in the United States is more difficult for foreigners to understand. The current political noise in the United States gives foreign investors a reason to "wait and see" before they invest in the United States. With a USD 2.8bn daily funding need, foreigners saying "wait and see" translates as "dollar goes down".