Orange face, cheeto, troll, tangerine tornado, tiny hands, the internet is full of nicknames that Donald Trump has been called. He's a man of contrast and controversy. The world is divided about POTUS, but there's one undeniable fact that "Trump effect" is not a myth, and that Donald Trump has a direct effect on the US dollar and foreign exchange. That's why forex traders should be wary about everything that President Donald Trump says or does.

Like with all the news, every time an influential person in the sphere of finance or politics speaks the market reacts. Considering the authority of the United States on the global politics and the history of the US dollar, it is no wonder that news from across the Atlantic navigate the markets and have such a strong impact on their direction.

The last decade traders observed crisis unfold. 2008 is the best example and also one of the reasons for which still when the dollar breaks out, financial-people worry. You must know that the dollar is the reserve currency of the global economy. It is used in pricing assets around the world like commodities and is borrowed internationally as a liquid, highly-credible source of funding that's available cross-border. And whenever something is borrowed, it has to be paid back, but in this case, the dollar is paid back in relatively less valuable currencies. The worst part is that the borrowed amount becomes larger as it becomes harder to pay back.

Examples of aggressive dollar strengths between 2008 and now can be observed a couple of times, for instance in 2014 when the Federal Reserve began discussing monetary policy tightening as other banks like the European Central Bank, Bank of Japan and Bank of England have been loosening policies to encourage growth and support their export sectors.  In 2014 it didn't end there, as many traders probably remember the near crash in commodity markets.

To the point, Trump is unlike any other President of the United States. Before his victory in the presidential elections, most economists and political observers would have never predicted that he will be elected. His win came with as much surprise as his run for the office. However, that is not the key concern for the purpose of this article. The main concern is the surprise element that seems to be integral to Trump's politics. Almost everything he says and does seem erratic, especially when it comes to his social media presence. His demeanour is tripolar, as everyone knows something about him and has an opinion or a feeling about him, be it good or bad, even those who do not necessarily follow or have any interest in politics.  It is in some way revolutionary! Without any further ado let's look at the financial markets concerning the US elect.

After the US Presidential Election, financial markets seemed to be confused. The views of the candidate had a substantial impact on the markets, especially that Trump has positioned himself as an outsider willing to play by his own rules. Many expected his programs to roll back the trend of globalisation to benefit the dollar at the expense of other economies.

The main factors determining currency values are trade and capital flow. The trade comes from the order flow of exports and imports to a country. The later comes from the order flow of investments in and out of a country.

Much of Trump's campaign aimed at enforcing one of the ideas that trade and production happening within the United States of America would offer a desirable currency position, more than in other countries. I'll try to put it in simple English without all the financial jargon. What you must understand is that inflation expectations steer much of what is decided by the Federal Reserve. Consequently, when you have a Republican president in power that has built a career on leveraging balance sheets to build infrastructure, a fiscal stimulus that could lead to inflation is to be expected, as the majority of the Congress would be likely to support such.

Fiscal stimulus could lead to policy divergence which in aggressive monetary policy earned the name of 'taper tantrum.' The issue with pending inflation and aggressive monetary policy is such that the Fed might partially delay monetary policy tightening to prevent too much discord in the global economy, but consequently, there are fewer alternatives.

The best place to observe this kind of divergence is between the Fed and Bank of Japan. The sharp rise in USDJPY off the 99/101 level that we saw hold last summer is the result of extreme monetary policy divergence between these two bodies and the approaches they take. However, within the Euro spectrum, we could also see how the price of the EUR fell against the US dollar back in 2016 after the US presidential elections. You can check live, up-to-date market reports here.

Another issue at stake with Trump effect are all the trade wars we hear about. To make it clear, Trump declared that he does not desire to participate in trade deals where the United States does not have a positive net present value. Back in November 2016, the then President-elect noted that he wishes to withdraw the US from the Trans-Pacific Partnership (TPP). That consequently leads to an example of how the US can put the macroeconomics ideal of global trade on its head, as for many the TPP is meaningless without the US. Wherever we see that smaller economies are at risk from such decisions, we will see the USD strengthen and other currencies weaken, especially when they're dependent on external trade and financing.

What you must look out for as a trader is the dollar index, but also keep an eye out on all the news coming from across the Atlantic as they're going to help you determine what the next possible steps by the Fed are. Also, watch the action of the Fed concerning yields, such as the US 2-year yield. Any hikes? Aggressive action? These decisions might be influenced by the anticipated inflation hanging over the US dollar, consequently accelerating the US dollar further.

The topic is somewhat complex, but I hope I made it sound as easy as possible. You will find many sources online talking about the Trump Effect, so if you're interested in the topic and you feel like it is mirrored in your trading, go ahead and read up on it!