HSBC: The dollar looks like it's about to repeat an ugly move that happened under Reagan — but that's exactly what Trump wants

pulse

June 1, 2017 4:59 PM

The dollar is set to drop after its surge, as it did in the 1980s, but at a quicker pace.

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President Donald Trump has been compared to President Ronald Reagan in many ways.

In a note on Wednesday, HSBC strategists did this through the lens of the US dollar.

The greenback surged to a 14-year high in late 2016 as Wall Street hoped for pro-growth policies from the incoming president and the Federal Reserve raised interest rates.

"The trajectory of the USD envisaged by our FX team is quite similar, but more compressed, to the way in which the USD behaved in the 1980s under President Reagan," wrote John Lomax, HSBC's head of global emerging-market equity strategy. "Reasons for the compression in the timetable include a much higher starting level of the debt stock; less cyclical strength, lower inflation and a more dovish central bank; and less political cohesion between the presidency and the House."

The dollar surged from 1981 through the start of 1985 in response to the pro-growth consequences of loose fiscal policy, Lomax said. But it reversed course as the US faced two widening deficits, with spending running ahead of revenue (fiscal deficit) and imports exceeding exports (current account deficit).

At the start of Trump's presidency, some of his pro-growth proposals, including heavy infrastructure spending and tax cuts, were seen as positive for the dollar. However, there's increasingly a sense that some of these fiscal measures won't be passed or will end up being negative for the dollar, Lomax said.

HSBC's currency team has four reasons the dollar, which is about 6% off its postelection high, could further weaken this year: