Dollar Shrugs Off Trump’s Infrastructure Pledge as Doubt Sets in Over Viability - Here's Why

There are many hurdles to a new infrastructure bill and markets are sceptical over the economic impact of the current plan, while trade protectionism is still threatening the Dollar.

The US Dollar continued its January downtrend during early trading Wednesday after an eagerly anticipated State of The Union address from President Donald Trump failed to deliver a boost for the US currency.

Markets had been waiting to hear official details of the White House plan for infrastructure spending during the years ahead, while being braced for a possible salvo of protectionist trade rhetoric that could have further aggravated an already beleaguered Dollar.

Trade related rhetoric was conspicuously absent from the address and, although some details of the administration’s plan for infrastructure were unveiled during the speech, they failed to dispel a growing cloud of scepticism over whether an infrastructure bill will ever see the light of day outside of Congress.

"As we rebuild our industries, it is also time to rebuild our crumbling infrastructure."

"America is a nation of builders. We built the Empire State Building in just 1 year — is it not a disgrace that it can now take 10 years just to get a permit approved for a simple road?"

"I am asking both parties to come together to give us the safe, fast, reliable, and modern infrastructure our economy needs and our people deserve."

"Tonight, I am calling on the Congress to produce a bill that generates at least $1.5 trillion for the new infrastructure investment we need."

"Every Federal dollar should be leveraged by partnering with State and local governments and, where appropriate, tapping into private sector investment — to permanently fix the infrastructure deficit."

"Any bill must also streamline the permitting and approval process — getting it down to no more than two years, and perhaps even one."

"Together, we can reclaim our building heritage. We will build gleaming new roads, bridges, highways, railways, and waterways across our land. And we will do it with American heart, American hands, and American grit."

President Donald Trump, 2018 State of The Union address 

President Trump’s original plan to spend $1 trillion on infrastructure was a significant factor behind the Dollar index’s 5% rally between the election in November 2016 and the end of that December.

That rally took place as traders bet that such a volume of investment would boost the US economy, lift inflation and demand a faster pace of interest rate rises from the Federal Reserve.

“The lack of detail on infrastructure spending is hardly surprising. After a tax reform package that will add USD 1.5trn of debt in a decade, the scope for direct government spending on infrastructure is minimal,” says Derek Halpenny, European head of global markets research at MUFG.

Leaked details of the latest White House plan for infrastructure had already shown Trump’s pledge being watered down somewhat before the State of The Union address Tuesday. However, markets still lack sufficient information to be able to assess the potential economic impact of the plan.

“Trump’s SOTU speech had little detail on infrastructure (he “is calling on the Congress to produce a bill that generates at least USD1.5trn for...investment”),” chimes Elsa Lignos, head of FX strategy at RBC Capital Markets.

Increasing numbers are also saying the bill is either unviable, or simply not worthy of much more consideration, as there are significant doubts over whether Republicans can enlist enough Democrat support to get the bill through Congress, particularly as it would add further to the budget deficit.

“Investors may ‘look through’ Trump’s intent for a $1.5 billion infrastructure bill – one of the few policy proposals made during the speech – given (a) the lack of bipartisan support and (b) doubts over funding the bill. All of this suggests the weak $ dynamics are still very much in play,” says Viraj Patel, a foreign exchange strategist at ING Group.

Beyond doubts over the bill’s passage through Congress, the real rub for markets is that Federal money will be provided through grants to the private sector that only cover up to 20% of a project’s costs.

“The Federal funding would be worth only 0.1% of GDP per year over a decade, and would be spread too thinly to have a major impact in any one region. Furthermore, the actual spend could be even less if the Federal grants aren’t fully taken up,” says Andrew Hunter, an economist at Capital Economics.

This means a substantial amount of private sector funding will be required to get new infrastructure projects off the ground and this assumes that there are enough “shovel ready” projects to absorb a meaningful level of expenditure in the short term.

The Dollar index was quoted 0.29% lower at 88.92, close to a three year low, during early trading in London Wednesday. The Pound-to-Dollar rate was marked 0.49% higher at 1.4134. 

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Protectionist Rhetoric Remains a Risk to the Dollar

Tuesday’s address came closely on the heels of a week-long controversy that saw the US Dollar punished when Treasury Secretary Steven Mnuchin told reporters a weaker greenback is a good thing for American trade. (More on that here).

“Following the (innocuous in our view) comments on the dollar by US Treasury Secretary Mnuchin last week...market participants were braced for rhetoric in the State of the Union address that might have reinforced the impression that the new policy focus following the passing of tax reform legislation would be trade protectionism,” remarks MUFG’s Halpenny.

The speech also came amid the renegotiation of the North American Free Trade agreement and following President Trump’s decision to impose tariffs on the importation of washing machines and solar panels, which have brought fears of a trade war back to fore. (More on the issues at play here).

“Global markets may be able to breathe a sigh of relief given the President’s lack of focus on trade or protectionist policies – though one wouldn’t need to look beyond the narrative around foreign or immigration policies to note that nothing has in fact changed in regards to the administration’s ‘America First’ ideology,” says ING’s Patel.

Despite an absence of trade rhetoric in the State of The Union address, the teams at both MUFG and ING have warned that the administration’s attitude toward current conventions on international trade is still a risk to the US Dollar.

“President Trump will no doubt see the recent bounce between mid-December and mid-January in his approval rating as evidence of the benefit of following through on campaign promises which may well encourage more aggressive policy action on trade protectionism,” says Halpenny.

The extent to which the US Dollar continues to be affected by ongoing concerns over trade will depend largely on evolving fears over the potential for a trade war in future. Analysts and economists almost all say a possible trade war would be bad for the Dollar even though, ordinarily, simple protectionism and new import tariffs are positive drivers of the US currency.

“The US, who is not only the world’s biggest economy measured in GDP, but also records by far the largest trade deficit globally, is the prime example of a large country,” writes Thu Lan Nguyen, an analyst at Commerzbank.

Large countries like the US can have a significant impact on demand for goods globally and therefore, the global prices of those goods, when they impose tariffs on imports.

This is because tariffs can mean America imports less from the rest of the world and insteady, consumes more of its own goods. These own goods are no longer exported elsewhere and so US products become more scarce on the global market.

“This leads to an excess demand for US products, respectively a demand deficit for foreign products. So as to return to equilibrium on the global markets, the price of US goods relative to foreign goods will have to rise. In other words the real USD exchange rate will rise,” writes Lan Nguyen.

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