Dollar Image Still Eroding

July 23, 2017

The initial advance of the dollar after Donald Trump’s election has been erased. The euphoria had stemmed from a belief that federal government policy would be legislated more easily with single party control and that the Trump proposals of tax relief, financial market deregulation, fair trade, and infrastructure repair would lift productivity, shrink the trade deficit, encourage the Federal Reserve to raise interest rates and make the United States a more attractive place for net foreign capital.

None of the above expected developments ensued. The most worrisome elements of Trump nationalism have deepened. Fiscal paralysis persists. The Fed has raised interest rates three times and is making plans to reduce its balance sheet, but the operative word to characterize monetary policy normalization remains “gradual” because price and wage inflation remain lower than officials anticipated. Life during the Trump presidency has been extremely unpredictable and increasingly so due to the broadening investigation into its possible ties with the Russian government. An end to this investigation is nowhere in sight, and the president isn’t handling the situation well.

The dollar has not yet depreciated to levels that argue for a near-term corrective bounce and even a period of stability. It’s not near historic lower boundaries. Since many European monies merged into the euro at the end of 1998, the euro has ranged between $1.6038 and $0.8228, with a range midpoint of $1.2133. The dollar at this past week’s close was less than 4% from that center, and the greenback is still 47% stronger than its all-time trough relative to the Japanese yen. In trade-weighted terms, the dollar has merely returned to the vicinity of its value last Labor Day when U.S. elections kick into high gear, and the 10 percentage point amplitude of its trading corridor since then has been manage by the standards of major historical swings at about 10%.

The most troubling aspect of the dollar’s outlook is that the United States appears to be undergoing a sea-change in its relations with the rest of the world. The dollar’s unchallenged claim to being the world’s predominant paper currency developed in a context that’s now in upheaval. The pecking order of reserve currencies is held together with great inertia, and how America’s relations change in the period ahead remains truthfully unclear. But even when the old order was not in flux, the dollar proved at times to be highly volatile based on discrepancies between the U.S. business and policy cycles and those of other countries.

That said, you can’t go home. It’s very hard to see America going back to any role that it’s held before. A paradox seemingly exists that U.S. democratic institutions seem incompatible with sustained economic growth, but also domestic demand-led economic strength in the long run doesn’t seem possible if democracy breaks down. The intrusion of cybernetics into every facet of economic activity and the glue between individuals and community makes the problems faced in the 21st century all the more daunting to face. Given how much has transformed since the Y2K scare, it takes a leap of faith to think that the natural order of the last century including the dollar’s central role in the international monetary system will endure unscathed.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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