What’s in the dollar price?
The U.S. dollar rose sharply against a host of currencies after the general election result. But what does this rally mean for the medium term?
Elsa Lignos, RBC Capital Markets’ Global Head of FX Strategy & Head of EMEA Institutional FX Sales, believes the price does not reflect the potential impacts of an administration that might take an aggressive approach to reshaping global trade.
“We’re not really pricing in the more extreme scenarios in terms of tariffs,” she explains. “There are certainly scenarios where we could see euro-dollar trade to parity, and through parity.”
At present, however, with much long dollar positioning already in place, it would require new developments to trigger further highs in the currency, Lignos adds.
Volatility unlikely to last
For now, volatility reigns in the FX market. In the immediate election aftermath, some corporates added to hedges. Some have since sought opportunities to profit on long dollar trades.
“On the option side, we’ve seen huge demand for dollar topside on the part of both institutional investors and corporates,” Lignos notes.
This has not been reflected in spot trading, however: “Unless you see spot breaking to new highs in the U.S. dollar, you’re really going to struggle to see that volatility maintain its current pace – even though there’s so much uncertainty out there.”
Deficit is not a long-term risk
While some Trump advisers have indicated they favor a weaker dollar, this is hard to achieve through unilateral action, says Lignos. “When physical intervention is at odds with monetary policy, the impact is fairly short-lived,” she says.
She is sanguine, however, about the ability of the U.S. to finance its budget deficit without risk to the currency.
Unlike the period before the global financial crisis, there is currently a private sector surplus, she notes: “As long as both households and, in particular, corporates are running these elevated savings levels, then you’re less likely to see the budget deficit turn into a major currency story.”
“As long as both households and, in particular, corporates are running these elevated savings levels, then you’re less likely to see the budget deficit turn into a major currency story.”
Elsa Lignos, Head of FX Strategy and Head of EMEA Institutional FX Sales, RBC Capital Markets
