Implications of Trump's win and US dollar's rise

A packet of former US President Abraham Lincoln five-dollar bill currency is inspected at the Bureau of Engraving and Printing in Washington on Mar 26, 2015.
A packet of former US President Abraham Lincoln five-dollar bill currency is inspected at the Bureau of Engraving and Printing in Washington on Mar 26, 2015.PHOTO: ST FILE

The US dollar has strengthened in the wake of Mr Donald Trump's election victory, but markets in Asia have become more volatile as traders price in what a Trump presidency could look like, OCBC head of treasury research and strategy Selina Ling said yesterday.

Markets have rationalised that the incoming Trump administration will boost infrastructure spending and building, which will require more workers. But with the United States' unemployment rate hovering at just below 5 per cent, coupled with Mr Trump's anti-immigration stance, the more likely scenario is wage inflation, which will ultimately compel the Federal Reserve to raise interest rates, she said.

"So in anticipation of fiscal stimulus leading to a bit more inflation, leading to a more hawkish Federal Reserve, people think that the dollar will strengthen," she said.

But it is unclear how long the rally will last.

"Markets' rationalisation of how Trump will affect the dollar is quite peculiar because they're focusing on the infrastructure spending and not so much on how he's going to finance that, because we do know that the suspension of the debt ceiling will end in March next year," she said.

 
 
 

As for the gyrations in Asia, these can be explained by the large degree of exposure that countries here have to overseas shifts, said Ms Ling.

With optimistic US dollar and bond yield sentiment on the rise, market-sensitive portfolio flows that came here in the aftermath of the global financial crisis are now on their way out of Asia.

The US dollar's role as the undisputed global reserve currency also protects it from threats, especially in uncertain times, she added.

"In the near term, I think it's a topsy-turvy world where, when things are more uncertain, the dollar benefits," she said.

Governments in Asia are keeping their fingers crossed that the US President-elect will be a "pragmatist businessman" when he enters office.

"Sitting here in Asia, you will still feel discomfited because any sort of economic or trade dispute - it doesn't have to be a currency war, it doesn't have to be a trade war - will have implications for the rest of Asia," she said.

A version of this article appeared in the print edition of The Straits Times on November 30, 2016, with the headline 'Implications of Trump's win and US dollar's rise'. Print Edition | Subscribe