Will Protectionism Kill the Dollar Rally?

The dollar rally has been based on a growing economy and the expectation of higher interest rates to stem inflation. Now that Trump is pursuing protectionism before economic stimulus the dollar is falling Bloomberg writes that the dollar extends losses as Trump starts dismantling trade pacts.

The dollar remained on a defensive footing in U.S. trading after President Trump signed an executive order to withdraw from the Trans-Pacific Partnership and said he will renegotiate Nafta and introduce a tough border tax, with losses pared only slightly after a Fed official said he favored faster rate hikes than some of his colleagues to avoid the risk that the Fed gets behind the curve.

Trump’s trade stance added to concerns that protectionism may curb potential benefits from yet-to-be detailed plans for fiscal stimulus that are intended to lift the economy from its sluggish growth path.

It may well be that Trump would be happy with the end of the dollar rally as he has said that the dollar is too strong anyway. How fast will trade issues progress and what will be the eventual outcome for the dollar?

Concerns about Protectionism

CNBC refers to the 7 week low of the dollar as the fade of the Trump trade.

The dollar wallowed near its lowest levels since early December on Tuesday, kept under pressure by concern that U.S. President Donald Trump was focusing more on protectionism and less on pro-growth economic policies.

Forex traders in general think that Trump is putting the cart before the horse. His proposals to stimulate the economy with tax cuts, infrastructure spending and repatriation of offshore corporate cash evoked rallies of the stock market and the dollar. However, the threat of a trade war or more likely the slow and steady exclusion of the USA from growing Pacific Rim markets has traders worried that exports will be badly hurt, that the economy will shrink instead of grow and that the Fed will be forced to hold off on interest rate increases. Boeing worries that China won’t buy their airplanes and US agriculture fears that the Chinese will buy their rice, wheat, corn and soybeans from Brazil and Argentina instead of the USA.

The Risk of Upsetting the Apple Cart

Trump likes to mix things up, make everyone worry and then come back in to get a better deal. Will that work in dealing with the world’s second largest economy? The New York Times says that Trump is injecting high risks in altering relationship with China.

Mr. Trump’s arrival in Washington has injected high risks and an uneasy ambiguity into the American relationship with China, a frequent target of his ire, and his peremptory disposal of the trade agreement suggests that his style may not be isolationist as much as unilateral.

If Mr. Trump was willing to toss aside years of delicate negotiations with allies and decades of American trade policy, he could also go his own way on issues he has staked out with China, including on its trade policies, Taiwan and the South China Sea.

China sees itself as the largest economy and world’s most powerful nation by the end of the century if not before. They can also see Trump’s pulling out of the TPP which was mean to contain China as a sign of American retreat. Along with killing the dollar rally Trump’s actions may well be steps along the way in killing American global dominance. The concern in the end may not be that the dollar falls or rises in value but that it becomes irrelevant.