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Nov 2nd 2016, 11:43 by Buttonwood
YESTERDAY s decline in the American stockmarket, on news of a narrowing in the
poll gap between Hillary Clinton and Donald Trump (under two points according
to Real Clear Politics), confirms the argument made in last week s column. A
combination of Mr Trump s adverse policy proposals on trade, foreign policy and
the Federal Reserve, and uncertainty about how much of this agenda would get
through Congress, would hit equities hard were he to be elected.
But what about the dollar? The picture is far from clear. Over the last 24
hours, America s currency has lost ground against the Swiss franc, euro, yen
and sterling but gained against emerging market currencies like the Mexican
peso and Brazilian real. That makes some sense. A Trump victory would make
international investors less confident about the direction of American economic
policy. This in turn might lead to the Fed being less willing to tighten rates
in December, another reason for the dollar to weaken.
On the other hand, Mr Trump s trade policies tearing up NAFTA and threatening
tariffs would, if implemented have an adverse impact on many emerging markets.
That is why the Mexican peso has been the most sensitive currency to his
opinion poll rating. His other hints about downplaying America s military
alliances in Asia, and its role in NATO, would also hit EM currencies.
Furthermore, one Trump policy encouraging, or forcing, foreign multinationals
to repatriate their overseas earnings might eventually lead to dollar strength.
It is the exorbitant privilege of America that it is the global reserve
currency and can benefit from a flight to safety, even when (as during the 2008
subprime crisis), it is the place that has caused the shock. Americans who had
invested overseas might bring their money home. So the trade-weighted dollar
might not be too badly hit by a Trump win (it is higher than it was six months
ago, for example).
But if the dollar falls back against developed world currencies, those nations
won t be happy as that will, in effect, be a tightening of their own monetary
policy. That might cause the ECB and Bank of Japan to indulge in a further
round of monetary easing. The prospect of that merry-go-round continuing may
explain why gold is up more than 20% this year.