Can Trump’s Talk Reduce the Value of the Dollar?

The new American president thinks that the dollar is too strong. He attacks China as well as Germany for currency manipulation of the Yuan on one hand and simply taking advantage of a weak Euro on the other. Trump wants a weaker dollar but if his proposed economic stimulus policies take hold they will cause inflation and the Federal Reserve will jack up interest rates. And that will result in stronger dollar. The only way we see a weaker dollar is if Trump and his billionaire buddies mess up, cause a trade war and decimate the greenback. NASDAQ writes about Trump vs. the Fed and calls it a dollar dilemma.

Conventional wisdom to start 2017 was that reflationary policies by the Trump administration would lift U.S. yields and this would boost the U.S. dollar. Instead the year-to-date has frustrated the conventional wisdom trades as U.S. bond yields have been contained and the dollar has struggled to build upward momentum. This has seen equities be the main beneficiary of the reflation trade as headwinds from a firmer dollar and higher interest rates have so far not materialized.

Reasons that the dollar has not advanced more in 2017 include the slowness of Trump’s economic stimulus measures in arriving. They also include his oft repeated comments that the dollar is too strong. The question is can Trump’s talk reduce the value of the dollar over the long term? Central banks certainly know how to signal their willingness to support a currency to the extent that the market reacts and they never need to act. But in the case of Trump and supply side economics the US will be awash in cash if corporate cash returns from offshore, tax breaks occur and a trillion or so in infrastructure improvements takes place. That will certainly, in the near term, jack up the economy, drive inflation and raise interest rates. The downside risk to the dollar includes a total mess up and trade war.

Inflation in the Wings

No matter what the President thinks Fed confidence in inflation is growing according to Bloomberg.

Policy discussions when the Federal Reserve last met may show greater confidence in the inflation outlook and a debate over options for winding down the U.S. central bank’s massive bond portfolio, feeding discussions over the timing of the next interest-rate increase.

Thus an increase in interest rates is waiting in the wings for the right data and a Fed decision. Because the dollar trades in the open Forex market there is no ability to reduce the value of the currency unlike when the greenback was tied to gold. Our belief is that in the short term any fiscal stimulus by the Trump administration and Republican congress will result in a spurt in business and a continuation of the Trump bump stock surge. While investor may benefit in the short term there is concern that over the long haul supply side economics do not work out that well. Witness the 2008 market crash and ensuing Great Recession. That, in the end would be a way to reduce the value of the dollar without even saying a word.