Will Protectionism Help or Hurt the US Dollar?

Candidate Donald Trump promised high tariffs against China and other protectionist measures. If he follows through will protectionism help or hurt the US dollar? Forbes weighs in on the question of where the Trump train is taking the dollar.

Assuming president-elect Donald Trump gets his tax cuts and brings in billions of offshore corporate cash, the foreign direct investment flow into the United States, in theory, could be quite impressive. Moreover, if rate hikes do come in December, and assuming the central banks of Japan, Europe and the U.K. have thrown in the towel on NIRP, ZIRP and QE, we will have an unwinding of low yielding debt. That will push down bond prices. Bad for current bond fund investors, but good for savers who have been watching their money values vanish since 2008.

“From the perspective of the financial markets, the immediate reaction to the outcome of last week’s election has been a stronger dollar due to expectations of a loose fiscal and tighter policy mix,” says Neil MacKinnon, an economist with VTB Capital, a Russian investment bank with offices in London. The current increase in bond yields might mark the end of the 35-year bull market in fixed income, something that was actually predicted precisely 12 months ago by fixed income money managers at Schroders.

The main casualties from dollar strength and protectionist concerns will be the emerging markets, but even this will depend on the country.

If a trade war and currency war evolved due to Trump’s policies it will hurt both exports and the economy. The Federal Reserve has estimated that US exports fall 3% in a year and 7% after three years for every 10% rise in the dollar versus a basket of foreign currencies.

A Change in US Monetary Policy

The American president appoints members of the Federal Reserve’s Board of Governors. Over the next year and a half Trump will be able to replace five members of the board including Fed chairperson Janet Yellen. The redefining of Fed policy with a set of new and hawkish members would be as much as a 25% appreciation of the US dollar. The problem for Mr. Trump is that a significantly higher dollar will be a drag on US exports. To the extent foreign direct investment flows into the US and an aggressive program of fixing US infrastructure takes place inflation in the USA could become a major issue, even with an expensive dollar.

Not So Good for the Economy

According to CNBC Trump’s protectionism will bite the US economy more than those of emerging markets.

The U.S. and President-elect Donald Trump have more to lose taking a protectionist path than the emerging economies that would be affected by a renewed anti-globalization policy, the chairman of Societe Generale told CNBC.

There are widespread concerns that Trump’s promises to rip up trade agreements, including the Trans-Pacific Partnership, will affect the economic potential of emerging markets. This is particularly sensitive at a time when such economies are already struggling to keep previously-seen growth rates.

“If (emerging economies) start developing a free trade zone among Asian countries, for instance, in the end it will be the U.S. economy which will be penalized by its own measures,” Lorenzo Bini Smaghi, chairman of Societe Generale, told CNBC on Tuesday.

In other words if Trump starts a trade war and forces other nations into trade groups that exclude the USA it will greatly hurt the economy and eventually the dollar.