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”.
If, as has been mooted, President Trump’s team looks to encourage US corporates to repatriate funds currently held offshore, then that might not only push the dollar higher, through the obvious medium of non-dollar holdings being sold for greenbacks, but also exacerbate a potential funding issue already alluded to by Nakaso.
If offshore dollars which were originally being lent direct to international banks are repatriated and subsequently placed with US institutions, then while those US banks should lend on at least some of those dollars into global markets, there would be a price for that intermediation.
US banks are not charities. International banks’ dollar funding costs would likely rise at the margin. Dollars might both be slightly scarcer and more expensive to borrow let alone buy.
And that is without the possibility that the Trump Administration will impose a border adjustment tax on imports into the United States, which economists broadly agree would lead markets to re-price the dollar higher to compensate.
As for elsewhere, in the euro zone, monetary policy remains resolutely ultra-accommodative. Meanwhile, in Ottawa last week Bank of Canada (BOC) Governor Stephen Poloz made it quite clear that the Canadian central bank could still cut rates if circumstances required it.
Noting the strength of the US dollar, the Bank of Canada also tellingly noted that “because the Canadian dollar has held its own against the US dollar… it has also been rising against most other currencies”.
That has resulted in “two additional headwinds for Canadian exports”, the BOC said, namely that “softer US exports will mean lower demand for Canadian components of those US exports”, and that “Canada will lose more competitiveness in the US market compared with exporters from other countries”.
The currency market understandably subsequently pushed the Canadian dollar weaker versus its US counterpart.
But what holds for the Canadian dollar arguably also applies to the yuan. If the greenback does start to firm appreciably, and a rise in the dollar/yuan does not keep pace with an increase in the US currency’s value versus other major currencies, then China’s exporters could encounter the same headwinds as Canada’s.
President Xi Jinping may have said last week that “China has no intention to boost its trade competitiveness by devaluing the renminbi” but that surely doesn’t preclude a weakening of the yuan versus the dollar in the event the greenback soars against a host of major currencies.
President Trump may not like it but the attractiveness of the dollar in comparison to other currencies has arguably only been enhanced by his Administration’s fiscal policy plans and the Fed’s continued, if gradualist, approach to further rate increases.
“I trust the dollar,” Trump said recently. “I’m gonna trust the dollar a lot more in four years than I do now.” The currency market might well concur.