DEUTSCHE BANK: The dollar and the euro are all about politics

It looks like two of the world’s most important currencies might be reacting to politics rather than economics.

The US dollar index has fallen by about 11% against a basket of its peers since US President Donald Trump’s inauguration. It’s now at its lowest level since January 2015.

The euro, meanwhile, has been climbing since April 2017, and is now at its highest level since January 2015. It broke through 1.200 against the dollar last week, but has since reversed some of those gains.

A Deutsche Bank Asset Management team argues that the dates here are key because they suggest that the US and French elections might be the “major influence” on the currencies’ moves.

“These dates are important. They suggest, that for once, currency movements are based neither on the economy, nor the otherwise almighty interest rate differential,” the team wrote in a note to clients.

“This time it’s political. In a sentence, it’s all about Trump winning in the US and Macron changing investor perceptions on Europe.”

To illustrate their point, they included a chart comparing the trade-weighted dollar (blue) to the trade-weighted euro (orange):

The Deutsche Bank team’s argument is interesting because, generally speaking, developed market currencies like the dollar or the euro respond to economic data and interest rate decisions. On the other hand, investors generally see emerging market currencies as being more susceptible to political events.

But after several high-intensity elections and votes, developed market currencies now appear to be sensitive to political events as well. In addition to the dollar and the euro, we’ve also seen the pound bounce around after political news over the last year-plus since the Brexit vote.

This trend might not be limited to currencies, however. In December, Bloomberg’s Sid Verma reported that S&P Global Inc. said that key drivers of creditworthiness in developed markets — like the strength of institutions — can’t be taken for granted anymore.

“We believe it may no longer be possible to separate advanced economies from emerging markets by describing their political systems as displaying superior levels of stability, effectiveness, and predictability of policy making and political institutions,” according to Moritz Kraemer, chief sovereign ratings officer at S&P Global, in a 2017 outlook report entitled “A Spotlight On Rising Political Risks.”

If this trend continues, it would be a monumental shift for some developed markets.

See the latest EUR-USD movements here.

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