Share

Dollar pares drop as market frenzy toward Trump eases

New York - The dollar trimmed its earlier losses versus the yen as Republican Donald Trump was elected the next US president and made a conciliatory speech, after an initial shock among foreign-exchange traders who had all but priced in a Hillary Clinton victory.

Trump’s win is the second major jolt to currency markets in less than five months after Britain voted in June to exit the European Union. As Trump took to the stage just before 11:00, the greenback had already begun recovering from declines of as much as 3.8% against the yen.

The 70-year-old Trump’s victory is still expected to spur a sea change in US policies that directly affect the dollar, as his Republican Party secured majorities in both legislative houses. The real estate magnate has promised to tear up U.S. trade agreements, having called China the “grand master” of currency devaluation and argued that a strong dollar damages American competitiveness.

Trump also accused Federal Reserve chair Janet Yellen of playing politics, saying she’s kept rates too low during President Barack Obama’s tenure, suggesting that he will nominate someone else to lead the central bank once her term ends in 2018.

“It’s unexpected, and financial markets don’t like unexpected events,” said Steven Englander, global head of Group-of-10 currency strategy in New York at Citigroup, the world’s biggest foreign-exchange trader. “We’re really, for a while, going to be in uncharted territory because we don’t know how much additional volatility asset markets and economic outcomes are going to attain because of this event.”

The dollar fell 1.7% to ¥103.36 and sank 0.4% to $1.1065 per euro as of 12:07. Overnight implied volatility on the dollar-yen exchange rate was at its highest since September, down from an earlier level that was its most since 2008.

Forecasts off?

The moves, which began to moderate in early morning trading in London on Wednesday, made strategists’ predictions of what would happen in the case of a Trump victory look overblown. In a Bloomberg poll of the world’s top 10 foreign-exchange forecasters earlier this month, most saw the dollar falling to about ¥100.28 should he win.

“Investors have learned from the Brexit experience that economic fundamentals rather than political risks are what determines the longer-term outlook of the FX markets,” said Valentin Marinov, the London-based head of Group-of-10 currency strategy at Credit Agricole SA’s corporate- and investment-banking unit.

“The selloff could lose momentum if the economic data continue to show signs of relative resilience despite the political upheaval in Washington. One can even argue that Trump’s domestic policies could support domestic demand and thus the economy, at least initially.”

The market-implied chance of a December interest-rate increase by the Federal Reserve was about 78%, similar to Monday’s level, based on U.S. overnight indexed swaps that trade 24 hours a day. The OIS-derived probability tends to be a few percentage points lower compared with calculations based on fed funds futures, which stop trading around 01:00.

A gauge of the US currency has risen since mid-August as signs of faster economic growth and accelerating inflation fueled bets for Fed hikes.

Tighter monetary policy in the US bolsters the allure of American assets - and in turn the greenback - relative to Europe and Japan, where central banks continue to undertake unprecedented stimulus to boost flagging growth and inflation.

The Mexican peso plunged 8.8% against the dollar, after earlier diving about 12%. A decline was forecast by market analysts who saw the currency as a barometer for the election, rallying when Clinton advanced in the polls and falling when Trump gained ground.

Trump’s rhetoric has weighed on the peso in recent months as traders saw the country’s economy as particularly vulnerable to proposals such as building a wall on America’s southern border, seizing Mexican workers’ remittances and renegotiating the North American Free Trade Agreement.

The newly elected President struck a conciliatory tone in his first official address, promising to deal fairly with other people and other nations while protecting US interests.

Loonie’s losses

Canada’s dollar, also vulnerable to Trump’s anti trade-accord rhetoric, pared its declines. The nation’s two-way trade in goods and services with the US has surged since the accord between Canada, the US and Mexico came into force in 1994. The US is Canada’s largest foreign market, buying about C$400bn, or about 73%, of the country’s exports last year, data compiled by Bloomberg show.

“The Bank of Canada is monitoring the US election as an event risk considering the uncertainty it would bring to business investment in Canada and in the US,” Bipan Rai, a senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce in Toronto, said before the election.

“We can’t rule out the potential for further action from the BOC in the next couple of months,” he said, referring to a potential rate cut.

Despite the more measured market reaction hours after the first results came out, uncertainty over US economic policy is tangible and bodes for more volatility.

“Trump promised it would be bigger than Brexit and we tend to agree,” said Sean Callow, senior strategist at Westpac Banking in Sydney. “Not only has Trump promised radical change to trade policy and international relations, the GOP wins in House and Senate mean there are few constraints on his actions by historical standards.”

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.89
+0.2%
Rand - Pound
23.82
+0.3%
Rand - Euro
20.37
+0.3%
Rand - Aus dollar
12.31
+0.3%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders