US political turmoil weighs heavily on the dollar
James Chen, CMT May 22, 2017 1:18 PM
The current political drama began in earnest two weeks ago, after it was announced that Trump abruptly fired the Director of the FBI at the time, James Comey. This pivotal incident then unfolded into a series of unexpected events and revelations that have resulted in ongoing political turmoil in Washington.
Comey Firing Sparks Havoc
After the firing, reports and innuendos soon surfaced suggesting that Trump’s aim in dismissing Comey was to disrupt the FBI’s intensifying investigation into alleged Russian interference with last year’s US presidential election. Trump made comments both publicly (in televised interviews) and privately (to Russian officials), that appeared to help support these potentially incriminating insinuations.
Additionally, the release of Comey’s past memos concerning his earlier private conversations with Trump revealed that the President had allegedly asked Comey to halt the FBI’s investigation into Michael Flynn, Trump’s former national security adviser who was accused of colluding with the Russian government. Such a request by a US president would be considered a potentially impeachable offense constituting obstruction of justice. The memos also claimed that Trump had requested Comey’s personal loyalty and had asked if he was being targeted by the FBI’s investigation. After releasing the memos, Comey has personally stated that he believes Trump attempted to influence the investigation into Russian interference.
Ongoing Political Upheaval
As it currently stands, it appears that Trump’s massive political headaches have just begun. Congress is awaiting official testimony from Comey regarding his conversations with Trump in connection with the FBI investigations. Meanwhile, the US Justice Department has appointed Robert Mueller, the highly-regarded former FBI Director originally appointed by President George W. Bush, as Special Counsel overseeing the investigation into Russian interference. At the same time, the crucial backing from Republicans that Trump enjoyed in the early months of his term has begun to erode, as politicians that have supported him thus far have started to distance themselves and key White House staffers find their positions threatened.
While this political upheaval weighed heavily on equity markets in the first half of last week, as the major US stock indices fell sharply amid frenzied speculation over Trump’s future, stocks have bounced back strongly and seemingly shrugged off concerns for the time being, paring much of their earlier losses since the latter half of last week.
The US dollar, however, has mostly remained pressured, especially as other major currencies, most notably the euro, have gained significant tailwinds. Political concerns have played a key role in pushing down the dollar, as Trump’s recent plight has put into question his ability to implement the pro-growth and potentially dollar-boosting policies that he has promised. In turn, this has stoked concerns that the Federal Reserve may become more hesitant than previously expected when it comes to raising interest rates further. When placed against the international backdrop of rising inflation, economic growth, and pressure on central banks to tighten monetary policy in the Eurozone and UK, for example, any hesitancy by the Fed in extending its own rate hikes could compound the pressure on the dollar.
From a longer-term dollar perspective, much will depend on how President Trump fares under intense legal and congressional scrutiny, and whether he will be able to move on to fulfilling an ambitious economic agenda amid grave political troubles. On the shorter-term horizon, however, much of the concerns stemming from US political turmoil may have already been priced-in to the recently plunging dollar, and the beleaguered currency could therefore be due for an impending relief rally or rebound as political chaos under President Trump increasingly becomes business as usual.
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