Circumstantial Evidence Suggests Trump Wants Dollar to Weaken

March 14, 2018

As private citizen, presidential candidate, and president of the United States, Donald Trump has embraced the usefulness of commercial protectionism, that is the imposition of tariffs and other barriers to benefit strategic industries deemed at risk because of unfair foreign competition. He’s unafraid of trade wars and believes that America would win such disputes. Victory would be measured from a micro standpoint by the health of protected industries and in macro terms by elimination or even reduction of the U.S. trade deficit — particularly the largest bilateral imbalances but also the overall shortfall.

Dollar depreciation is one of the most powerful tools to manipulate the U.S. trade balance. Moreover, the negative economic risks of a dollar slide are less ominous in times of subdued inflation like now than at times when inflation is excessive.

The dangers of dollar depreciation are not limited to the inflationary consequences for imports, import-competing goods, and domestically made products that rely on imported materials and supplies. Countries will no doubt retaliate tit-for-tat with with barriers against U.S. exports. There will be far more U.S. consumers burdened with higher prices and reduced consumption choice than workers benefiting from increased jobs in the protected industries. As a departure from agreed protocols, a U.S. dive into protectionism will unsettle world financial markets. The U.S. economy for decades has enjoyed enormous advantages from the dollar being the hegemon among paper currencies as a reserve asset, that is a store of value and a transaction medium for invoicing and conducting business between nations. These benefits could weaken as the United States heads down a protectionist road and lend further momentum to a policy-engineered decline of the dollar.

The U.S. president has many subtle ways to drive the dollar lower. These include his twitter posts, the evolving Russian investigation and Trump’s reaction to such, foreign policy surprises, and actions that promote the chaos surrounding his administration. He doesn’t have to actually say he wants a weaker dollar. Others in the administration can do that, or all that’s really needed is to be silent as the dollar slip-slides to lower levels.

The dollar already has moved downward. From that fact, two things can be deduced. First, such fundamental dollar positives like divergent monetary policies and comparisons of growth haven’t deterred the dollar from depreciating. Secondly, nothing dramatically new has to be done from a policy standpoint. In trade-weighted terms, its 11% drop since the last week of 2016 has been much more meaningful than concurrent trade-weighted strength in the euro, yen, or Canadian dollar. From the dollar’s bilateral highs in late 2016 or early 2017, the dollar has lost about 16% against the euro, 13% relative to the Aussie dollar, 12% versus the yen and loonie, and 8.5% vis-a-vis the Swiss franc.

The dollar is not in unchartered territory. In fact it remains 24% higher than its trade-weighted value a decade ago. It was weak in March 2008, having dropped some 43% on a trade-weighted basis from a peak in July 2001. Note, too, that the dollar’s drop over the past 14 months or so remains small compared to the slide between mid-2001 and March 2008, meaning that there is no reason for U.S. officials to be worried that the dollar’s losses thus far are starting to get excessive. Indeed, market chit-chat regarding the dollar’s outlook over the balance of 2008 is not one-sided. Many pundits foresee a stronger dollar at yearend than now.

President Trump cannot be happy about recent growth in the U.S. trade deficit. The goods and services imbalance grew in each of the four past calendar years, and the deficit in February was 27% bigger than that in January 2017 when he became president. The cumulative merchandise trade deficit (that is, goods only) from 2000 through 2017 equaled $12.2 trillion.

One of the first lessons I learned working at the Federal Reserve Bank of New York’s Foreign Department in the mid-1970s is that it is much harder for the government leaders of a country with a depreciating currency to stop and reverse that trend than for leaders, who consider their currency too strong, to weaken such. If one is willing to subvert all other economic priorities to the goal of achieving a more competitive exchange rate, there is really no excuse for not succeeding in that effort. To transform a weak currency into one in which investors are very confident, by contrast, means changing expectations. This can take a lot of time and a painful transitional process.

President Trump seems to have the will and the means to ensure that over time the dollar is likely to slip to more competitive levels.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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