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The chart below shows how, since quarter four of last year, the trade-weighted US dollar has moved noticeably higher. This is mainly in response to the expectation of the greater inflationary impact of a Republican administration led by President Trump. Tariffs, tax cuts, deregulation, and a tighter immigration policy will all present challenges to the previously softer outlook for inflation. The US Federal Reserve has paused cutting interest rates as it continues to assess the fluid situation. At the same time, some of these policies could be positive for certain sectors of the US equity market, contributing to an outperforming US market over the same period. From here, we think this US exceptionalism trade could face some challenges. A stronger dollar makes American goods less attractive at home and abroad, while tariffs raise the cost of some goods. Tighter immigration policies could lead to margin pressures in labour intensive industries.
History suggests that the success of the “Trump Trade” could be short-lived. In late 2016, during Trump’s first term with a Republican-controlled Senate and Congress, we also saw a higher dollar and a strong US stock market, only for them to come under more pressure through 2017. For all these reasons, we recently reduced the extent of our overweight positioning in US equities and reinvested in euro area equities.
