Trump's concern over strong dollar rattles currency markets
President Donald Trump directly denounced a strong dollar and refrained from calling China a currency manipulator during an interview with The Wall Street Journal and several times after during the past week. During the presidential campaign, Trump promised to boost U.S. exports, but the current robustness of the currency has made domestic goods more expensive to foreign buyers.
The U.S. Dollar Index fell by 0.8 percent after the interview, but shot right back up the next day. Despite the rebound, the short-term instability hurt foreign institutions and investors who trade in dollars.
In an interview with CBS, Jonathan Loynes, chief economist at research firm Capital Economics said, “Trump word would have little or no impact on the greenback and he would struggle as dollar would continue to rise against other currencies as overwhelming demand keeps it aloft.”
This is a complete U-turn from what Trump’s predecessors previously preached while in office. Conventionally, a strong currency is equivalent to a strong economy because it represents a growing and prosperous nation.
The reason for the strengthening, he explains, is a result of the “confidence” placed in him, but it does not do him any favors as it works against what he is trying to accomplish. Since the election, the U.S. Dollar Index, a measurement that compares the dollar with a basket of other major currencies, went up by 4 percent. His campaign promises including tax cuts and infrastructure spending to revive the U.S. economy is part of the reason why.
Trump discussed how lowering interest rates and weakening the currency would work in his favor to rejuvenate U.S. businesses and create employment. However, the chances of that happening are slim. In the past 16 months, as the U.S. economy continued to recover from the 2008 crisis, the Fed increased short-term interest rates three times.
A strong dollar makes it hard to compete in an international market, where major exporting countries continue to devalue their currencies.
As the dollar strengthens, U.S. goods become more expensive to foreign buyers and imports become cheaper for domestic consumers, leading to lower domestic demand.
Benefactors of a strong dollar are emerging countries, especially those who have a large portion of their debt denominated in the dollar. Furthermore, the Fed’s ongoing interest rate hike works in their favor, since it weakens the currencies of developing countries making their exports favorable and more competitive in the international market.
In addition, Trump refused to call China a currency manipulator, just four days ahead of President Xi Jinping’s speech at the World Economic Forum. During the WEF, Xi emphasized the dangers of developed nations imposing protectionist policies. This indirectly served as a light jab at the current Trump administration and its proposal to induce a 20 percent tariff on imports. His claim that the Chinese government has not been manipulating its currency is seen as a strategic move from a foreign policy perspective. The United States needs China’s support in the ongoing talks about North Korea and any claim now could possibly jeopardize their bilateral relationship.
Trump has also waivered on other promises he made during the campaign, including his remarks of Fed Chair Janet Yellen. Despite being critical of her work in the past, Trump hinted at the possibility of renominating her for a second term. Yellen’s current term ends in 2018.