Along with a global sell-off in bonds, the rally in the U.S. dollar is one of the big stories of how world markets reacted to the outcome of the U.S. presidential election. Despite financial press reports, the dollar has not been a strong currency for most of 2016. The Brazilian real, the Japanese yen, the Russian ruble, the Norwegian krone, the Columbian peso and the Canadian and Australian dollars plus a few others have outperformed it (for full details of what happened in the currency markets in the first three quarters of 2016, see here). In the period immediately after the election, the U.S. dollar was the best performing currency in the world. It will have to rally for quite a while for this to become true for the year, however.
No matter what continent you look at, currencies fell against the U.S. dollar after the presidential vote was counted. By the week after the election, the worst performing currencies were down around 6% in Asia, Latin America, and commodity-based countries. In Europe, it was a little over 4%. A handful of currencies though were barely down and these were spread across all geographic regions.
Currency performance in Europe was similar for the euro (NYSEARCA:FXE), used by most of the continent, the Swiss franc (NYSEARCA:FXF), and the Norwegian krone. All were down by around 4% late in the week after the election. The U.S. dollar (NYSEARCA:UUP) was up was up 4%. The euro is the biggest component of the trade-weighted dollar (based on the relative amount of trade with the U.S.) and invariably moves in the opposite direction. The Swiss franc moves with the euro because the Swiss National Bank makes sure it does. The Norwegian krone is tied more to the price of oil. It's sister currencies, the Swedish krona and the Danish krone tend to move with it. The best performing European currency post election was the British pound (NYSEARCA:FXB), which has been the worst performing currency up to that point in 2016. It was down less than one percent. Perhaps it just can't go down any more.
European Currencies and the U.S. Dollar Performance Immediately After the Presidential Election
Black line is U.S. dollar, Blue line the British pound, Red line the Swiss franc, Orange line the Norwegian krone, Bronze line the euro
Asian currencies were hit hard after the election too. The exception was the Chinese yuan (NYSEARCA:CNY), which is a fixed-rate currency allowed to float only within a narrow trading band. It was barely down. The Japanese yen (NYSEARCA:FXY), the second strongest currency globally in 2016 prior to the election, took the biggest hit, dropping more than 6% by week after the presidential vote. The Thai baht and Indian rupee were down around 2%. The Singapore dollar was down as much as the yen in the first week after the election, but then recovered enough to trade like the baht and rupee.
Asian Currencies and the U.S. Dollar Performance Immediately After the Presidential Election
Black line is U.S. dollar, Blue line the Indian rupee, Red line the Thai baht, Orange line the Singapore dollar
Latin America had the worst overall performing currency, and that was the Mexican peso. It was down almost 10% two days after the election. President-elect Trump's policies are considered especially negative for Mexico, and not because of his promised wall, but because of his desire to restructure the NAFTA trade agreement to impose tariffs on U.S. companies that manufacture there instead of in the United States. By later in the second week after the election, the peso was only down 6%, but expect it to be challenged going forward into 2017. The Mexican currency was already under-performing the U.S. dollar year-to-date prior to the election - one of the few currencies in the world to do so. Other Latin American currencies were outperforming the dollar in 2016, but after the election the Peruvian sol and Columbian peso wound up under performing it. They were down around one percent and two percent respectively, after the vote. The Chilean peso was down around three percent, but was still barely outperforming the dollar on a yearly basis. The Brazilian real was down around four percent, but since it was the strongest performing global currency in 2016, it was still soaring above the dollar year-to-date.
Latin American Currencies and the U.S. Dollar Performance Immediately After the Presidential Election
Black line is U.S. dollar, Blue line the Brazilian real, Red line the Columbian peso, Orange line the Peruvian sol, Bronze line the Mexican peso
It can be helpful to take a look at the currency impact of commodity-based economies, in addition to geographic regions. The South African rand was down around 6% and the Australian dollar was down almost 4% the week after the election. South Africa has its unique challenges that have hurt its stock market as well. The Australian dollar tends to move with gold and the price of gold fell substantially after the election. The least affected currencies were the Canadian dollar, barely down at all, and the Russian ruble, down about only one percent. Both countries produce a wide range of commodities. Perhaps the market is hinting that a Trump administration will be favorable for the commodity markets.
Commodity-Based Currencies and the U.S. Dollar Performance Immediately After the Presidential Election Black line is U.S. dollar, Blue line is Canadian dollar, Red line Australian dollar, Orange line South African rand
For the moment, the U.S. dollar is the king of the currency universe. Even dollar holders can take a position in the dollar by purchasing the currency ETFs: UUP and USDU. If the Federal Reserve raises rates in December, as is considered highly likely, this will only feed the dollar rally. Eventually this will cause trouble in the stock market by lowering earnings of multinational companies. It will also make American exports more expensive, which will be bad for the U.S. economy. If the dollar rally continues, the Fed will probably be forced to take some action to cool it down in the first half of 2017.
For a discussion of how the presidential election impacted U.S. stocks, see here. For a discussion of how the election impacted global stock markets, see here. For a discussion of how the election impacted global bond markets, see here. For a discussion of how the election impacted the commodity markets, see here.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.