The U.S. dollar exchange movement has received a lot of attention recently. President Trump took the unusual step of discussing its strength against other currencies, and stating it was “too strong.” The dollar had strengthened, notably over the last couple of months, due to the prospect of a Trump presidency, a strong U.S. economy in comparison to the other countries, and the Federal Reserve raising interest rates.
However, due to Trump’s knack for speaking out, it ‘s hard to ascertain exactly what policies he will pursue and how the market will react. We outline two scenarios: a strengthening dollar and a weaker one.
The case for a stronger dollar
The dollar strengthening against a basket of major currencies (the US Dollar Index, or DXY is comprised of the Euro, Yen, Pound sterling, Canadian dollar, Swedish krona, and Swiss franc), likely due to a Unites States’ strengthening economy and the Federal Reserve signaling higher interest rates. The stronger dollar accelerated after the November election, with the index rising from about 97 to over 102 in January. The reason was attributed, at least in part, to the prospect of Trump expansionary fiscal policies, such as his discussion of a large increase in infrastructure spending. The theory is that this will make the U.S. economy stronger, with higher interest rates making this a more attractive place for foreigners to invest.
A strengthening dollar makes goods more expensive for foreign buyers. This also holds true for real estate. Foreign investment in New York’s real estate market has grown, according to experts, although there is no hard data. A year ago, there was an estimate that foreigners comprised 15% of all buyers, and 40% for new development. All else being equal, a higher price would curb demand for real estate, which is good news for domestic buyers.
However, there is also a bullish case that can be argued. Foreigners may be more attracted to New York real estate, particularly if they believe the dollar will continue to strengthen. This would create price appreciation due solely to the move in exchange rates.
The case for a weaker dollar
The dollar has weakened over the last couple of weeks. Trump stated the dollar was “too strong,” indicating he would support a weaker dollar. Notably, Trump cited the Chinese currency in his recent comments as well as those he made on the campaign trail.
Although most presidents have promoted a strong dollar, Trump, of course, is atypical. A weaker dollar would make U.S. exports cheaper compared to foreign goods, and imports more expensive. This is in-line with Trump’s stated preference to promote domestic goods and services over foreign counterparts. Still, it is difficult to decipher his messages day-to-day.
A weaker dollar make real estate cheaper in terms of the foreign currency. On the surface, this would boost demand for New York City real estate, and increase prices. However, if foreigners expect the dollar to continue to weaken, they may shun the market.
Where do we go from here?
Pinning down where the dollar is headed is challenging under the best of circumstances. There are special challenges with Trump in office, given his penchant for making statements and tweets. Overall, his administration’s impact is difficult to gauge, but New York City is likely to remain attractive in the long-run.