Chart of the Month
This chart presents the US Dollar Real Effective Exchange Rate (REER) index overlaid with the gross national savings rate, (expressed as a share of gross national income) with a 2-year lead. In a period of loose fiscal policy, the savings rate may rise as individuals anticipate higher tax liabilities in the future (the principle of Ricardian equivalence). It may also rise due to uncertainty over inflation or political stability (the precautionary saving principle) or in periods of stronger income or higher GDP growth (a wealth effect). On the other hand, well-developed financial markets increase the attractiveness of financial asset ownership, tending to reduce the savings rate during periods of fiscal or monetary stimulus. If we think that the fiscal stimulus will increase the preference for financial assets in the medium term, the savings rate should decrease as people dissave to own more assets, therefore impacting the US Dollar.
President Trump is hoping against hope that a booming US economy in the middle quarters of 2018 will turn the tide of his unpopularity and secure enhanced Republican majorities in November’s mid-term elections. His hopes are founded on soaring business and consumer confidence readings that rival those around the stockmarket top of 2000. Yet, instead of an approval rating in the mid-60s, as then, president Trump scores in the low-40s, having explored even weaker territory before the recent fiscal relaxation.
There is a debate raging over the characterisation of the US Dollar: is it a defensive currency that performs better in a risk-off environment or has it entered a structurally weak phase that may stretch over a number of years? Perhaps the latter; it seems that the high tide for international – especially Asian – participation in US securities markets has passed. A fundamental reconsideration of the role of the US Dollar could undermine its traditional role as a protective international asset in volatile markets.
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