The possible sealing-off of the US domestic market with protectionist measures (customs duties) sends a warning sign towards currencies of the following countries: China, Mexico, Brazil and the remaining export nations from Asia and South America. The export world champion, Germany, could also be directly affected.
Donald Trump’s objective is to boost the US domestic market. He wants to achieve this through massive government military spending and spending on the urgently needed expansion of the country’s infrastructure, thus, taking into account an increase of the public debt. In addition, he wants to stimulate private consumption via tax cuts. In order for these increased consumption expenditures to be reflected on the balance sheets of the US companies, he intends to increase tariffs, that is expand protectionist policies. This is what his constituency wants and this is why he was elected. The negative consequences of such policies are already partially anticipated today by the financial markets. The interest rates for the US government bonds have risen massively. The yield on a 10-year US government bond is now at 2.2 percent compared to 1.8 percent on the day before the elections (see chart). The interest rate on newly issued bonds thus rises by a whopping 22 percent per annum! The reason is easily comprehensible. Growing public debt due to increase in government investment spending and tax cuts causes immediate increase of an inflation rate.
The prospect of higher interest rates has also lent wings to the US dollar. After a brief period of swaying back and forth immediately after the elections, the dollar has shown its full strength since. Compared to the Swiss franc, the parity has been overcome; However, the strongest rise was recorded by the greenback against the euro (see chart). This has to do with the new uncertainty regarding the future of the European Union, vide Italy. The Italians will be voting on a constitutional reform on December 4, the components of which (for example, the downgrade of the Senate) are secondary; However, Minister President, Matteo Renzi, has tied his political fate to the outcome of this vote and consequently, also in Italy the political establishment could get slapped in the face by the folk; for nothing seems impossible anymore, or so the lesson from Brexit and Trump. New elections following a defeat would weaken not only Italy but also all of Europe. The euro exchange rate already today shows signs of jittering.
There are several reasons for the ascent of the British pound. On one hand, euro’s weakness makes the pound shine in a better light, on the other – United Kingdom maintains excellent trade relations with the United States. Also a possible rise of US protectionism towards the European Union has been since the Brexit a lesser problem for the UK. The crucial reason, however, is the court ruling stating that the British government must consult the Parliament on the separation from the European Union. The probability of Brexit-light has, therefore, increased somewhat. And last but not least, with its unexpected vote outcome, the UK is no more the only exotic one.
US dollar rally (compared to euro)
Last but not least:
“I am the best president God has ever created.”
Donald Trump
Your Wealth at a Glance.
