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60 seconds on fading political risk and the outlook for the dollar

Keith Wade discusses global political risks and the consequences of a weaker US dollar.

06/06/2017

Keith Wade

Keith Wade

Chief Economist & Strategist

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CPD Accredited

Political risk has faded somewhat this year, particularly with the election of Emmanuel Macron as president of France. He is a centrist and he is pro-EU, so that was quite a big step forward for markets and a knock-back for the populist, Marine Le Pen. Markets have been cheered by that result.

Political risk has not disappeared entirely

There is still political risk though. In Italy, for example, they need to hold an election by May 2018 and the Five Star movement is very strong there.

More immediately, we have the general election in the UK. Most commentators think that the UK election will reduce political risk, because it will make Theresa May much stronger as a prime minister; she will be able to push for a “soft Brexit”.

But remember, there are about 60 hard-line “Brexiteers” in the Conservative party, so her majority must go over 60 in order for her to have that control.

Where next for the US dollar?

Meanwhile, in the US, President Donald Trump is facing his own fair share of problems. The president is still facing impeachment calls related to his alleged ties with Russia. That has led to a weaker US dollar.

Now, the weaker US dollar is something that we’ve been looking for for some time. This is mainly because we believe that it has overshot; over the past couple of years, it’s risen very strongly.

Although the Federal Reserve will be raising rates, we think the outlook for the dollar is going to be somewhat weaker going forward. That might create a few problems for the euro and the yen, but it certainly is a positive for the emerging markets.