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If the president is the standard bearer for the currency, Donald Trump himself will have to stop being a negative in order to get the dollar back on its feet.
Boosted by the Trump trade, the dollar had soared after his election on the prospect that lower taxes, fiscal stimulus, and deregulation would boost the U.S. economy. But that trade has reversed, and the dollar index is now down 6.6 percent from its post-election high and down 0.9 percent since the election.
"The Trump premium in the dollar has become a Trump discount. Global capital just doesn't feel safe coming to the U.S.," said Robert Sinche, chief global strategist at Amherst Pierpont. Besides the worries about the U.S., the dollar has been falling particularly hard against the euro, which is rallying on an improved outlook for the euro zone economy as well as expectation the European Central Bank will pull away from easy policies.
The Trump trade in the greenback has evaporated, as Washington became engulfed in the investigation into whether the Trump campaign had ties to Russia. The concern is Congress and the White House are too distracted to push through a new health care bill and then get to work on tax reform, which had been a positive catalyst for stocks.
J.P. Morgan global strategists studied investor positioning in a range of asset classes and stock sectors. "We conclude that there is little unwinding left to be done from here from the previous post-election build-up of Trump policy related positions," the analysts wrote in a note.
In fact, they say the trades reversed even before the latest wave of negative news for Trump emerged last week, when there was a daily barrage of negative headlines. There was the naming of an independent counsel to investigate his campaign's ties to Russia. News reports also said the investigation had found a person of interest among the president's top aides in the White House. Even before that, there were reports that when Trump met with Russian diplomats in the White House, he reportedly revealed classified information to them, as well as told them that former FBI director James Comey was a "nut job."
Sinche said the dollar's decline could be reversed, in part by central banks if the European Central Bank does not move away from its easy policies June 8 and the Fed raises interest rates, as expected June 15.
"I think it's been the whole issue of what is his policy. Are we moving anywhere on tax reform? The whole monetary, fiscal policy mix? People thought it was going to be a very expansionary fiscal policy and a tightening monetary policy, and it's all up in the air," said Sinche.
Trump is currently on his first overseas trip as president, so the news focus has been more on that and less on the investigation this week. "He's having a good trip so far. He stayed on script. These things could correct themselves, but once you get skepticism, once you lose confidence, it's awfully hard to get it back," he said.
Some analysts say the dollar will be stuck until Comey testifies before Congress after the Memorial Day holiday. Comey reportedly said that Trump asked him to end his investigation into Michael Flynn, Trump's former national security adviser at the center of the investigation. "It's a turning point if they think it will lead to worse things for Trump. If it's better, you get a little bit of a relief rally," he said.
Alan Ruskin, head of G-10 currency strategy at Deutsche Bank, said investors who are shorting the dollar do not appear to be concerned about the potential for a Fed rate hike in June to send the currency higher. Market expectations are high for a June rate hike, but less so for a second rate hike this year.
"Something constructive on the U.S. fiscal front would be a much more powerful tonic for [dollar] support. However, domestic politics has seriously curtailed, although by no means completely extinguished expectations of a U.S. fiscal stimulus," Ruskin wrote in a note. He added that the dollar will have a hard time recovering ahead of Comey's testimony.
Sinche also said a fiscal boost, like the sudden effort to push tax cuts, would be a big positive for the dollar.
JP Morgan strategists, in studying the fade of the Trump trade, looked at the speculative trading positions taken in interest rate and other futures. They found the positions betting on fiscal stimulus, or higher interest rates, had reversed fully by April. They also said extreme long positions in the dollar on the Trump trade, as of the end of last year, had cleared prior to last week.
The markets have also been focused on the Fed, and speculation has focused on the possibility that the Fed would go slower with hiking rates if things get worse for Trump.
As for the dollar, it more broadly reflects the view of foreign investors.
"There's just a general unease with international capital coming into the U.S. If you're not getting capital coming in for political reasons then the current account deficit takes over," Sinche said. That would make the currencies of countries with account surpluses more positive. That would include the euro and yen, since they represent countries with current account surpluses, or a positive difference between a nation's savings and investments.
"If I look at interest-rate differentials, I think the dollar should be 3 percent higher than where it is. I think it's actually getting a pretty big discount," said Sinche.