Strong US dollar likely to be early casualty in Trump’s trade wars

China and the EU reply with their own bullish salvoes to president’s suggestion that the US would find a trade standoff with anyone ‘easy to win’

PUBLISHED : Tuesday, 06 March, 2018, 9:41am
UPDATED : Friday, 23 March, 2018, 12:58pm

“When a country [the US] is losing billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” tweeted US President Donald Trump on Friday.

Bravado? Perhaps. But Trump arguably has a trump card: the currency market could deliver a weaker US dollar.

A weaker greenback could nominally strengthen Trump’s trade stance by making all imports into the country more expensive in US dollar terms, encouraging import substitution by manufacturers, while simultaneously making all US exports cheaper on world markets.

From that perspective, the currency market could reasonably assume Washington wouldn’t be averse to a lower greenback in a period of trade tension.

As Tokyo discovered in the early years of President Bill Clinton’s first term, when US Treasury Secretary Lloyd Bentsen essentially weaponised the greenback as part of US attempts to erode the growing size of the US trade deficit with Japan, the currency market delivered a weaker US dollar versus the yen.

The dollar/yen exchange rate fell from 125 on the day of Clinton’s inauguration in January 1993 to below 100 by June 1994.

In truth, there’s no sign yet that the Trump team will openly weaponise the greenback, even if the adherence to a strong US dollar policy of current Treasury Secretary Steven Mnuchin does seem more nuanced than that of his immediate predecessors.

But that doesn’t mean the currency market will still view a weaker greenback as a natural consequence of the US’ proposed adoption of steel and aluminium tariffs.

The two could go hand in hand.

Of course, the currency market might not necessarily apply a blanket approach to US dollar selling, given last week’s announcements are product specific, under section 232 of the 1962 Trade Expansion Act, not country specific.

China does not want to fight a trade war with the United States, but we absolutely will not sit by and watch as China’s interests are damaged
Chinese Vice Foreign Minister Zhang Yesui

For example, if the currency market perceives the economic prospects of a major iron ore exporter, such as Australia, will be impaired by steel trade tensions, it might conclude the Australian dollar to be less attractive as an alternative to the greenback, even if the US currency was more broadly pressured.

Equally, while market participants could reasonably conclude that in this scenario a lower US dollar would suit the Trump Administration, as the impact of the tariff adoptions could themselves push up US prices and potentially crimp the country’s economic growth, a weaker greenback might anyway be justified.

By definition, an across-the-board 25 per cent tariff on imported steel and one of 10 per cent on aluminium imports will increase the prices of those products, and of goods that incorporate them, in the US.

Its manufacturers that rely on such imports of steel and aluminium in their own manufacturing processes may find their own sales are negatively impacted if the tariff cost effects are passed onto US consumers or, if those firms absorb the tariff costs, that their profit margins are eroded.

Either way, that wouldn’t necessarily bode well for US economic prospects.

Commerce Secretary Wilbur Ross may have already characterised the tariffs as “no big deal,” but companies such as Chicago-headquartered brewer MillerCoors are voicing disquiet.

“This action will cause aluminium prices to rise. It is likely to lead to job losses across the beer industry,” MillerCoors tweeted on Friday.

At the same time internationally, others may well take umbrage at what the Trump Administration is proposing. There is a potential for retaliatory action.

“Should restrictions be imposed on Canadian steel and aluminium products, Canada will take responsive measures to defend its trade interests and workers,” Canada’s Foreign Minister Chrystia Freeland said on Thursday. As the top supplier of aluminium and steel to the US, Canada has a lot at stake.

“China does not want to fight a trade war with the United States, but we absolutely will not sit by and watch as China’s interests are damaged,” said Chinese Vice Foreign Minister Zhang Yesui at the weekend.

As for the European Union (EU), it is already pondering retaliatory tariffs on certain US products.

“We will put tariffs on Harley-Davidson, on bourbon and on blue jeans – Levis,” European Commission President Jean-Claude Juncker said on Friday, prompting Trump on Saturday to tweet that if the EU “wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars.”

Trade battle-lines are being drawn up.

An apolitical but opportunist currency market may conclude that, with trade tensions rising around the world, circumstances logically point to targeted US dollar weakness.