President Trump’s most recent rants in favor of a weak dollar have to remind one of King Canute ordering the incoming tide to halt.
Like King Canute, who found that his orders had little effect on the incoming tide, so too Donald Trump will find that his calls for a weak dollar will have little effect on the dollar’s present upward trajectory.
However, there would seem to be one fundamental way in which President Trump differs from King Canute. Whereas King Canute’s policies had little to do with the ebbs and flows of the tide, President Trump’s policy actions have been a major contributor to the dollar’s strength.
As in the case of other economic problems, President Trump chooses to blame others rather than himself for the dollar’s current inconvenient strength. However, this time around, in blaming Federal Reserve Chairman Jerome Powell, he does have some case even though he chooses to miss the bigger picture about the dollar’s strength.
Where he does have a case is that an important factor in the dollar’s strength has been the different monetary policy stance between the United States and the other major industrialized countries.
Whereas until recently, the Fed was tightening monetary policy by raising interest rates and reducing the size of its bloated balance sheet, the European Central Bank and the Bank of Japan were maintaining and indicating that they intended to continue maintaining a very loose monetary policy stance.
As was to be expected, the resulting prospect of rising U.S. interest rates relative to those abroad certainly played a role in the dollar’s strength.
Where President Trump chooses to miss the bigger picture is that he willfully turns a blind eye to the role that his administration’s expansionary budget policy has played in causing the divergence between U.S. monetary policy and that of the other major economies.
By introducing a massive tax cut in 2017 and by going along with large public spending increases at a time that the economy was at full employment, President Trump left the Fed with little option but to tighten monetary policy.
Failure to tighten monetary policy in those circumstances would have been inconsistent with the Fed’s mandate to prevent the economy from overheating and to keep inflation in check.
President Trump also chooses to ignore how his trade policy is contributing to the maintenance of low interest rates and an easy monetary policy stance abroad.
By engaging in a trade war with China and by threatening to impose a 25-percent import tariff on European and Japanese automobiles, President Trump is seriously undermining investor confidence in those economies.
It should then come as little surprise that those economies’ central banks have responded to the resulting slowing in their economies by keeping their monetary policies loose relative to that of the United States.
Unwittingly, President Trump is also contributing to the U.S. dollar’s strength by enhancing its safe-haven status. He is doing so by cheerleading the populist and anti-European forces in a number of European countries like Hungary, Italy and Poland. He is also doing so by openly campaigning for a hard-Brexiter like Boris Johnson to replace Theresa May as U.K. prime minister.
Raising serious questions about the euro’s future and increasing the prospect that the United Kingdom will soon crash out of Europe without a deal, he is reducing the number of competitive currencies to the dollar to which investors can find a safe haven at a time of global economic uncertainty.
A purported economic policy goal of President Trump has been to eliminate the U.S. trade deficit. However, since taking office in January 2017, rather than declining that deficit has increased by more than 25 percent.
A further strengthening of the U.S. dollar would clearly not be helpful in meeting the trade deficit objective in that it would further encourage imports and dis-incentivize exports.
History is littered with examples of jawboning failing to meaningfully move the dollar. If President Trump were serious about wanting a weaker dollar, he would engage less in empty rhetoric and in blaming others.
Rather, he would do well to revisit his budget and trade policies that have been the principal factors underlying the dollar’s present strength.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.