Swirling controversy about President Trump's conversations with ex-FBI director James Comey sent stocks and interest rates spiraling lower this week. Many of the "Trump trades" that performed so well in the wake of the president's surprising victory on Nov. 8 reversed course, erasing a chunk of their post-election moves.
One of those trades is ahead of them all in its fade. Not only has it reversed course, but the U.S. dollar has completely erased all of its gains since Election Day. On Wednesday, the widely followed U.S. Dollar Index fell for its fifth-straight session, bottoming out at 97.43, the lowest point since the election.
The buck is now down 4.5% year-to-date, while the largest ETF tracking the currency, the $659 million PowerShares DB US Dollar Index Bullish Fund (UUP), is down 4.8%.
YTD Return For US Dollar Index & UUP
Pro-Growth Agenda Pushed Back
It's not hard to figure out why the greenback is falling. The latest allegations against Trump, regardless of whether they are true or false, will likely push back his pro-growth economic agenda. Health care reform, tax reform, deregulation and infrastructure spending all become more difficult when the president is having to defend himself on a near-daily basis.
Less growth translates into a weaker dollar. That's without even accounting for the effect on the Fed's tightening schedule. If the central bank slows down its rate hikes in light of the latest events, that's another big weight on the U.S. currency.
Overseas Outlook Brightens
All that plays into why the dollar fell most recently. But the greenback has been falling steadily for much of the year, ever since peaking at 14-year highs during the first few trading sessions of January. Since then, the outlook for overseas economies has brightened considerably, giving a boost to nondollar currencies at the expense of the buck.
In the case of Europe, expectations are rising that the economy has improved enough for the European Central Bank to put together an outline for winding down its €60 billion/month quantitative easing program as early as June. Meanwhile, data from the International Monetary Fund indicates emerging markets could see their fastest economic growth in four years in 2017.
That's all positive for dollar rivals and the ETFs that track them. Just to name a few, the $274 million CurrencyShares Euro Trust (FXE) returned 5.6% so far this year; the $258 million CurrencyShares British Pound Sterling Trust (FXB) returned 5%; and the $47 million WisdomTree Emerging Currency Strategy Fund (CEW) returned 6.3%.
Where does the dollar go from here? That's hard to say; currency markets are some of the most difficult to forecast, as evidenced by how ill-timed the bullish dollar calls at the beginning of the year now look.
The current downtrend in the buck could reverse in a flash if Trump can show he's an effective president, and he along with the Republican Congress are able to pass their pro-growth economic measures.
Moreover, a look at the chart for the U.S. Dollar Index reveals that the currency hasn't yet broken any critical levels. The index has been essentially range-bound between 93 and 100 since early 2015, with a brief breakout above the top of that range in the aftermath of the election.
US Dollar Index
In fact, the dollar is following the same pattern from 2015 and 2016, when it peaked early in the year, sold off during the middle of the year and then staged a comeback late in the year. So far, this year fits that mold perfectly, though of course, eventually the pattern will break.
Contact Sumit Roy at [email protected].