The latest events to impact on the strength of the dollar against a basket of other currencies merely served to underline the truth that the international currency exchanges appear to be behaving in an unusually febrile and reactive manner. The days when the events which generally caused large shifts in the values of currency were centred on economics – such as a change in interest rates, a slump in GDP or a round of quantitative easing – are long gone, and it is now often the smallest nuance of a speech or even the tenor of the latest Presidential twitter outburst which seems able to send a currency rising or falling.
The two events which impacted on the strength of the dollar in recent days can in no way be characterised as trivial. What is illuminating, however, is the manner in which any fluctuations appear to be extremely temporary in nature, with a correction of the position taking place with very little prompting. The first event sent the dollar plummeting to a new low of 91.55 against a basket of six other currencies on Tuesday 29th August, and was the North Korean launch which sent a missile flying over the northern Japanese island of Hokkaido. In particular, this event, and the fear that it would lead to a further ratcheting up in international tension, saw currency exchange traders handling increased investments in the yen and the Swiss franc, both traditionally seen as safe havens.
Two things eased the jitters of the currency markets, however. The first was the unified and coherent international response, with the UN Security Council publishing a unanimous condemnation which played the vital role of indicating that China, whilst being less vocal in its criticism of North Korea, is committed to enforcing existing sanctions against the rogue state.
The second calming aspect of the international response was the relatively measured response of President Trump. In contrast with previous threats to reign ‘fire and fury’ down on the country, and rather than firing out a string of late night/early morning tweets, President Trump issued an official statement, via the White House, noting that the world had received the message from North Korea ‘loud and clear’ and that all options were on the table.
The relief at the unified and reserved nature of the international response to the missile launch was reflected in the fact that the dollar rebounded to 92.47 by the morning of 30th August. The next event which looks set to be capable of impacting on the strength of the dollar is tropical storm Harvey and the economic fallout of disastrous flooding which has already managed to disable 20% of the crude oil refining capacity in the US. Whilst it may seem crass to ponder the economic impact of an event which is causing displacement, personal hardship and loss of life, the response to Harvey may well have a direct impact on the dollar.
In the first instance, the multi-billion dollar nature of the cost of the flooding itself will impact directly. On top of this, investors will be keeping a careful eye on the response of the government, and whether the help provided reinforces or counters the wider narrative of White House chaos and incompetence. In the longer term, some commentators are speculating that the once in a generation nature of the storms may prompt President Trump to soften his stance on the topic of climate change slightly. Whilst this will be welcomed by many people, it may increase the widely held fear that the tax cuts and financial stimulus promised by president Trump – a promise which helped to explain the relatively positive response from the markets to his initial victory – are never in fact going to arrive.