The dollar could deliver a ‘Trump bounce’

The “Brexit bounce” that many investors experienced after the EU referendum was largely caused by changes in exchange rates. Will that other political earthquake, the election of Donald Trump, affect our portfolios in the same way?

To recap, the Brexit vote caused an immediate and sharp fall in the value of the pound from which many investors benefited in two ways. First, companies in the FTSE 100 index tend to make much of their money overseas – and these profits instantly became worth more in sterling terms. The market responded by sending the share prices higher.

Second, British investors often invest directly in overseas markets via funds: for example, the popular and successful Fundsmith Equity fund holds much of its money in American shares, as does the strongly performing Scottish Mortgage investment trust. The share prices of these portfolios’ holdings, which will be quoted in dollars or other foreign currency, also received a boost in sterling terms when the pound fell.

In light of the influence of currency movements on our investments, many will be wondering what Mr Trump’s win will do to the dollar.

All predictions must be speculative at best. But Trump policies such as restricting immigration and increasing expenditure on infrastructure are widely expected to stoke inflation. Should this happen, America’s central bank in likely to increase interest rates, which will attract foreign funds and boost the value of the dollar.

However, Andrew Bell, the chief executive of the global Witan investment trust, said: “This thought should be tempered by the experience that the US rapidly disowns a strong dollar as soon as it impinges on its own economy.”

Of course, things could work out very differently. Mr Trump has also threatened to retreat from free trade, which could hit the global economy hard. In this event, a strong dollar is much less likely.