What's going on here?
The US dollar hit a five-week low versus other major currencies on Friday. Combined with some other indicators, it’s a reflection of investors losing some confidence in the “Trump rally.” (tweet this)
What does this mean?
The US Federal Reserve (“the Fed”) increased its target interest rate last week. Higher interest rates are supposed to be positive for the value of a currency, as foreign investors are more likely to move money into a country – and thus buy that country’s currency – where the returns are more attractive (i.e. a higher interest rate is paid). However, the Fed did not signal that it would raise interest rates more quickly than it had previously forecast, which led some investors to downgrade their assumption for US interest rate hikes later this year – so some sold the dollar.
Why should I care?
For the markets: Some of the “Trump” trades are running out of steam.
When Trump was first elected, investors quickly began betting on a substantial improvement in the US economy that would particularly benefit smaller US-focused firms. They also bet on a huge increase in government spending on infrastructure (e.g. new airports) and so the stocks of construction-related firms jumped up. The possible prospect of higher interest rates helped push the US dollar to a 13-year high. But in recent weeks, as it has appeared that Trump’s plans will take longer to implement than previously thought, investments predicated on these themes have declined in value.
The bigger picture: People’s and businesses’ higher confidence levels may not be fully translating into more actions.
Confidence in the economy, from people and businesses, is generally seen as a good indication of where the economy is heading. Since the election, confidence indicators have hit multi-year highs, which suggests people and firms are going to spend more money (e.g. eating out more often / hiring more workers). However, some data on real economic activity has suggested that the high confidence may not be feeding into action as quickly as expected.