Dollar on the brink, and its weakness is the result of Trump's policies

Three zlotys and sixty groszy – that is how much you currently have to pay for the American dollar and it is its lowest price since May 2018. At the same time, the dollar has had the worst six months in 20 years, and there is little indication that it will return to investors' favor.

The last six months have shown how much can change on the market. The fact that the dollar is so cheap for us today has little to do with the situation in Poland, although the złoty remains strong (or even slightly overvalued) and this should be counted as a plus, especially considering the geopolitical situation. The weakness of the dollar is the result of Trump's policies, and this is also a paradox, because during the election campaign Trump was seen as a pro-dollar candidate, and the strengthening of the dollar was an element of the so-called Trump Trade. So what has changed?

Market expectations were heading towards a pragmatic, pro-growth and slightly pro-inflationary (through a moderate increase in customs rates and transferring some production to the US) economic policy, and although ultimately the changes in customs policy may not be as big as the market feared at one point, there was a widespread perception that the changes were more harmful to the US than to its partners and were being implemented very chaotically (although this was to be expected). The data, which, although relatively stable, has changed more in favour of Europe (rebound of indicators compared to a slight deterioration in the US) does not help.. At the same time, while the Fed is currently more hawkish than other banks (keeping rates on hold when Europe cuts), the president’s undermining of Powell has also had a negative impact.

The key argument is the deficit

Trump campaigned on irreconcilable promises to extend and deepen tax cuts and reduce the deficit. Republicans have frequently criticized the Biden administration for the uncontrolled growth of debt, according to the Budget Office. Markets may have had no greater illusions here, but the bill finally passed in the Senate yesterday goes absolutely in the direction of the first promise, absolutely trampling on any hopes not only for fiscal consolidation, but even for stabilizing current trends. The new law is to add about $3 trillion to the deficit over 10 years. As it turns out, it's much easier to talk about fiscal discipline when you're in opposition. Although there is currently no good alternative to the dollar (as a reserve currency), at the beginning of the year the American currency was quite overvalued and the market rightly assumes that with such fiscal needs this may not be justified.

The bill now heads to the House of Representatives, where theoretically it will once again be quite tight, but expectations are that it will reach Trump's desk this week. It is possible, however, that after it is signed, the market (by selling facts) will correct somewhat the recent cascading weakening of the US currency.

Due to the Friday holiday in the US today (ADP report, 14:30) and tomorrow (NFP) we also have important data from the labor market. At 8:35, the euro costs 4,25 zlotys, the dollar 3,61 zlotys, the franc 4,56 zlotys, and the pound 4,96 zlotys.

Source: Dr. Przemysław Kwiecień CFA, XTB