The Republican Senate leader has already downplayed the idea of massive infrastructure spending and President–elect Trump’s pick for Treasury secretary has said he expects tax cuts to be partially offset by limiting deductions.
Could they get rid of mortgage interest tax relief? Perhaps the effects on the budget deficit will not be as large as the market first thought?
Finally, the third factor—trade. Yes, if President-elect Trump follows through with his protectionist tendencies and starts to raise tariffs on imports, one would expect a short-term impact to strengthen the dollar.
But that is just the short term impact. Over the long term, as the U.S. seeks to push its trade balance from a deficit to a surplus, that is likely to weaken the dollar.
You cannot convince other people to buy more of your goods without lowering the price and that must ultimately come from either lower wages for U.S. workers, which is highly unlikely and against the President elect’s policies and personal interest, or by lowering the price internationally through a weaker dollar.
So, whereas the dollar might be strengthening right now, things could easily change over the course of the next few weeks and months.
For the factors driving the dollar higher are neither as robust nor as persistent as the market seems to think.
So, by all means take strong dollar momentum as your best first guess as to the short term direction of the currency—just beware that it could change direction rapidly!
