Macroscope | President Trump’s ‘America first’ policy means the dollar is king

“We have a strong US dollar. We’re getting killed worldwide,” said Donald Trump back in March 2016, but an even higher dollar may be precisely what the currency markets deliver. Given the nature of President Trump’s policies to “make America great again”, the only way for the greenback may be up.

Trump’s loose fiscal policy settings, needed to finance his spending plans, combined with a gradual tightening of monetary policy by the Federal Reserve, will stand in sharp contrast to the situation elsewhere and lend support for a yet-stronger dollar.

As Anthony Scaramucci, a senior advisor to Trump, said at last week’s World Economic Forum; “You might not like the answer, but if you get better than expected growth in the US, even if the USD is going up, we saw in the 1980s, you can have a strong USD and fairly robust growth in the US that will lift the global economy.”

Bank of Japan (BOJ) Governor Haruhiko Kuroda made a similar point, saying on Friday that “the US economy is likely to accelerate growth this year and next year, and price inflation may somewhat rise”, and that “all of [these factors] may make interest rates rise and the dollar might also appreciate”.

The currency market might well decide that the dollar/yen exchange rate itself should begin to rise again as Trump’s agenda unfolds. The BOJ’s attempts to reignite inflation in Japan, currently encompassing a policy of leaning against rises in yields on Japanese government bonds, stand in stark contrast to the Fed’s tending towards further monetary tightening.

Also speaking Friday BOJ Deputy Governor Hiroshi Nakaso noted that “under monetary policy divergence, US dollar funding premia in the currency swap market could easily spike higher”.