Dollar recovers from Trump slump as pound falls back

The dollar gained ground on Monday (May 22) as markets realised the recent ‘Trump slump’ sell-off was an overreaction given the US economy’s sound fundamentals.

US futures gained slightly as uncertainty over the stability of Trump’s presidency died down.

However, the dollar slipped against the euro, which rose 0.36% to its highest point against the dollar since the autumn after comments from German chancellor Angela Merkel that she believed the euro to be “too weak”.

Brexit fears

Sterling slipped back slightly from the $1.30 it hit on Friday (May 19), compounded by fears of a ‘no deal’ Brexit outcome that resurfaced over the weekend.

The pound also slumped below €1.16 in early trading on Monday against the euro, a fall of 0.39% on Friday’s close.

Chris Saint, senior currency analyst at Hargreaves Lansdown, said there had been expectations the Fed would be lifting interest rates gradually in the US in the belief that Trump would forge ahead with his pro-growth agenda.

'US fundamentals sound'

“The underlying fundamentals are still sound, it’s just a question of what’s happened recently, and will that make it much harder for Trump to go ahead with his plans – and what that will mean for US rates rising later this year,” he said.

“There was a little bit of repricing on the back of last week’s uncertainties. A little bit of doubt was creeping in, but it’s still largely expected that the Fed will raise interest rates next month.”

The pound suffered after Brexit Secretary David Davis said in a Sunday Times interview that even “£1bn is a lot of money” to pay in terms of a potential EU ‘divorce bill’, and repeated that he would be prepared to “walk away”. His comments followed figures of a potential €100bn bill suggested by a Financial Times analysis.

“It’s going to be a pretty bumpy ride,” added Saint. “We had the dual impact of weekend developments – David Davis’ comments that he would be willing to walk away from negotiations. Then we had the polls that showed the lead for the Conservatives had narrowed over their views on care plans.”

He said it was clear initial Brexit talks were going to be difficult. “Everybody is setting out their stall and positioning themselves for what are going to be a long period of talks,” he commented.

“It’s going to be volatile, but the markets are going to have to filter out the day-to-day noise and factor in what is actually happening underneath the comments that are all coming out."