USD/EUR Suspiciously Timed Dismissal of FBI Director Hits the Dollar

Today it seems the market is reminded, in no uncertain terms, that with Trump at the helm it’s best to expect the unexpected. The U.S. President’s latest surprise was telling the director of the FBI, James Comey “You’re Fired.” The dismissal occurred just as the FBI investigation into Trump’s camp’s links with Russia seemed to be entering a significant new phase, which raises substantial concerns over the independence of the investigation. Furthermore, it seemed reminiscent of Nixon’s Saturday Night Massacre in October 1973 when President Nixon fired Archibald Cox, the special prosecutor looking into the so-called third-rate burglary that would eventually bring Nixon down.

Normally the dismissal of the director of the FBI would not be expected to impact on the financial markets or the dollar; however, under Trump, the act of firing James Comey has pulled the dollar lower for two reasons.

Firstly, the event has been interpreted as yet another example of an erratic and unpredictable president. And, given the market’s dislike of unpredictability, the act has weighed on the dollar.

Secondly, and perhaps more importantly, Trump’s behaviour could impact on relations with Congress. And without the support of Congress, Trump will struggle to deliver his promised infrastructure spending or tax reforms.

Why does the FBI Director’s dismissal matter to the dollar exchange rates?

The dollar rallied significantly on Trump winning the U.S. Presidential elections because of his pro-business expansionary policies: corporation tax cuts and infrastructure spending a part of the plan. A sizeable corporation tax cut would see a flood of money repatriated to the USA, which creates a high demand for the currency and, in turn, increases its value versus other currencies. Infrastructure spending in a country already close to full employment would push wages higher. Higher wages would in turn lead to more spending by workers and, thus, boost inflation. Higher inflation would then lead to higher interest rates as a way to curb consumer spending, creating a higher demand for the currency and boosting its value.

A political scandal such as the one brewing could negatively affect Trump’s relations with Congress and further delay the implementation of key stimulating policies such as tax cuts and infrastructure spending as Trump clarifies his rationale over his latest move. Or, worse still, prevent the reforms from going through at all.

The U.S. dollar initially weakened on the news, sending the euro U.S. dollar exchange rate within a breath of $1.09. Although, interestingly, the impact on the dollar hasn’t been sustained. Going forward, should the time-frame over Trump’s expansionary policies become more unclear or pushed further into the distance, then we could expect to see the dollar come under increased selling pressure.

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