Trump must watch what he says about the US dollar

Donald Trump has made no secret that he thinks the US dollar is too strong. Several times, the latest last week, he has said that the robustness of the currency is hurting the competitiveness of American exports, an issue that gets to the heart of his pledge to rejuvenate American industries and create jobs. But while such talk may strike a chord with supporters, it is not what those who hold or trade in the greenback want to hear. They expect strength and stability and each utterance negatively affects its value.

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The dollar has dropped in value each time Trump has spoken of the need for it to be weaker.

His latest remarks resulted in the dollar index, which compares the US dollar to other major currencies, falling by up to 0.8 per cent and US 10-year bond yields also dipped. There has since been a rebound, but such instability, no matter how short term, is not to the liking of many foreign governments, investors and industries that do business in US dollars. It is precisely because the dollar is strong and stable that it is the de facto international currency.

Previous American leaders have been only too aware of this, which is why they have followed strict rules to avoid jolting markets and giving the impression of manipulation. The treasury secretary has usually been left to comment and the standard line has been that a strong currency is good for America. But it is also in the interests of governments like China’s that hold vast levels of US dollars among foreign currency reserves and Hong Kong’s, which has pegged its dollar to the US currency for the sake of financial stability. A strong dollar helps China stem capital flight, but also impacts Hong Kong’s economy and property market.

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There is, after all, no more powerful currency than the US dollar. More than 60 per cent of the world’s known currency reserves are held in US dollars, about 65 per cent of all dollar bills that have been produced are being used outside the United States and seven countries have adopted the US dollar as their own currency while 89 have pegged theirs to it. Given such might, Trump needs to be careful about what he says.