President Trump constantly credits himself with the rising stock market. He's had nothing to say about the pronounced decline of the dollar.
President Donald Trump constantly credits himself with the rising stock market (a bull on the run long before he took office). He’s had nothing to say about the pronounced decline of the dollar. WEAK!, as he might tweet.
A strong dollar is especially fetishized by Republicans (when Democrats are in power) and by strong-currency types in general. I’ve never fretted too much. Like markets, the dollar’s relative value goes up and down, and being the world’s primary reserve currency is a built-in safeguard.
“Strong” and “weak” are potent but blurry words in this case. Currency exchange rates at whatever level create both winners and losers, even in America. Thus, exporters benefit from a weak dollar, but get hammered by a strong one, which makes their products more expensive for importers to purchase. A weak dollar provides a boost to buyers of U.S. stocks. It makes travel more expensive for Americans going abroad but is a value for foreign tourists coming here, and the companies catering to them.
Still, the situation since Trump took office is unusual. The dollar fell around 7 percent against the yen and euro last year, and another 2 percent this year. This happened despite a strong U.S. economy, coming close to “full employment,” and the Federal Reserve raising interest rates. All those would typically strengthen the U.S. currency. So would rising Treasury yields. But not this time. The benefits for the wealthy and corporations from the tax overhaul haven’t stopped the decline.
One unsettling explanation was floated by John Plender in the Financial Times: “…a structural shift may be under way whereby Trump’s dollar is losing its status as the pre-eminent global reserve currency. The suggestion is that managers of official reserves are dumping it in favor of non-traditional reserve currencies including the (Chinese) renminbi.”
If true, this would mark a tectonic shift. The dollar as prime reserve currency has meant an unlimited-balance gold card for the United States. Deficits, debt? Phoosh. Throw $6 trillion into wars in Iraq and Afghanistan? No problem!
Nobody is predicting a Weimar moment (at least from a currency standpoint), where Americans would have to haul wheelbarrows of money to buy a loaf of bread. Despite Chinese leader Xi Jinping’s hopes of making the renminbi a major reserve currency, central banks still hold small amounts. We’ve done fine with diversification in recent decades into the yen and euro.
But these are no ordinary times. “America First,” the administration’s policy, is predicated on pulling back from the 75-year-old American-led liberal world order. The benefits are theoretical, informed by ideology (on the left as well as on the right). The costs are not. We’ve cast aside the Trans-Pacific Partnership, which would have been a modest economic gain but a major geostrategic win. Trade barbs against China will ding U.S. companies and jobs. And the dollar is falling when it shouldn’t be.
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Today’s Econ Haiku:
The Davos question
Which Donald Trump will show up?
The one for ratings
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