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Dollar Drops & Bonds Buoyed!


Image source: Andriy Blokhin / Shutterstock.com

What's going on?

US bond prices hit seven-month highs while the US dollar dropped to a seven-month low on Tuesday – there’s been a big reversal for these investments since the immediate aftermath of the US election!

What does this mean?

After Donald Trump’s election, bonds sold off sharply and the US dollar rose because investors were initially excited about the prospect of economic growth. Why? Because if investors think that economic growth is about to pick up, they are more likely to sell bonds (because bonds offer only a “fixed” return in the form of a yield) and buy the currency of the improving economy. That’s partly because investors typically like to invest in countries where growth is accelerating (for example, in stocks in those countries).

So, as investors get more pessimistic about the prospects for growth in the US economy (as they have appeared to recently), bonds go up in price and the dollar comes down (relative to other currencies).

Why should I care?

The bigger picture: A slow-moving agenda in Washington seems partly to blame.

Immediately upon President Trump’s election, investors were buoyed by the idea that the Republican Party would control all three of the elected law-making bodies in the US (the House, Senate and presidency). Some assumed this would mean a relatively quick passage of laws, like tax reform and increased government spending on infrastructure, which would likely have boosted the economy (at least in the near term). It now seems clear that things aren’t moving quite as smoothly in Washington.

For markets: Central bank activities in regions like Europe and Japan play a role in this too.

Another factor likely pushing up bond prices in the US is the fact that the European Central Bank and the Bank of Japan are still buying huge quantities of government and companies’ bonds in their own currencies (a.k.a. quantitative easing). The result is that bond prices are very high in those countries/regions – and therefore investors have looked to US bonds, which had sold off, and bought them instead, thus pushing up US bond prices.

Originally posted as part of the Finimize daily email.

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