U.S. Dollar Strength: Is This What Trump Administration Wants?

Summary

• Over the past three months, the value of the US dollar has strengthened after falling through most of President Trump's time in office.
• The President has stated many times that he wants a weak dollar in order to support US goods and reduce the trade deficit in the balance of payments.
• The question is, what might Mr. Trump do if the value of the dollar continues to strengthen?

The value of the US dollar reached a two-and-one-half to three-month high yesterday. The Wall Street Journal Dollar Index closed at 86.13 yesterday, up from its near-term low of 82.70 reached on February 15, 2018.

At the close yesterday, it took only $1.991 to buy one Euro whereas on February 1, one Euro cost $1.2507, its near-term low.

As far as the Japanese yen is concerned, it took ¥109.86 to purchase one dollar at yesterday’s close, whereas it took ¥106.15 to buy a dollar on February 15.

It took $1.3612 to buy one British pound at the close of business yesterday, whereas it took $1.4262 to purchase one pound on February 1.

What has happened over this time period?

Well, for one, the growth rate of the European economies appeared to weaken from what many had come to expect for this year. The same for Japanese growth.

At the same time, it appeared as if the US economy might be picking up steam for the future.

At the same time, the Federal Reserve System appeared to be going through a regime change.

Jerome (Jay) Powell took over the reins as Chair of the Board of Governors of the Federal Reserve System from Janet Yellen. Although Mr. Powell has been a Governor for several years now, there has been a substantial amount of uncertainty about how his leadership might differ from that of Ms. Yellen.

For one, Ms. Yellen and her predecessor as Fed Chair, Ben Bernanke, have followed a monetary policy that stimulated the US stock market in order to produce a wealth effect that would increase and sustain consumer spending so as to spur on the macroeconomy.

In addition to this effort, Federal Reserve officials wanted to be sure to err on the side of monetary ease so as to prevent any liquidity problems in the banking system from happening that might result in the economic system plunging back into recession.

This was seen as the thrust of the Fed’s monetary policy ever since the Federal Reserve ceased its third round of quantitative easing in the waning months of 2014 and slowly began to increase its policy rate of interest.

Furthermore, because of the vacancies that existed at the Board of Governor’s level, President Trump had the unusual opportunity to appoint the five new Governors, representing a substantial change in the makeup of the seven-member Board. How these new appointments would impact Fed votes was unknown… although it was expected that under Mr. Powell’s leadership, policy would continue much as before.

Still, the world is changing and just how the new Board will act is anybody’s guess.

All this was hitting the financial markets early in February, and these factors had a substantial impact on the outlook of investors.

If anything, investors seemed to believe that if there was going to be a change in the Federal Reserve actions, it was going to be toward more increases in the Fed’s policy rate of interest.

The Federal Reserve had signaled that three rate increases were to be expected in 2018 with possibly three more coming in 2019.

Fed officials moved in March to raise its policy rate, but market expectations changed. Now, the market seems to expect three more increases to take place in 2018, with three more coming in 2019.

All this while the Federal Reserve is attempting to decrease the size of its securities portfolio and reduce the size of its balance sheet. And, then the government’s budget deficit is expected to increase substantially over the next ten years, swelling the amount of US debt in the financial markets.

So the Fed is facing all this and the European Central Bank is facing an economy that is not growing as fast as earlier expected.

Consequently, as the Federal Reserve produces more policy tightening than originally expected, the ECB is expecting to keep the monetary spigot open for a longer period of time, and this is creating an environment where the value of the US dollar is getting stronger.

But, what about the wishes of the Trump administration.

One of the reasons why the value of the US dollar weakened following the 2016 presidential election and continued to weaken up into February of this year, is that President Trump had been “talking down” the value of the dollar.

Mr. Trump came into office wanting a weaker US dollar to go along with his protectionist efforts and his desire for producing trade wars…with China, Europe, and other countries throughout the world.

If the US dollar gets too much stronger and gets too many headlines, one could expect that Mr. Trump would begin to “talk down” the dollar again, and might even propose other means to keep the value of the dollar as cheap as he can. This to help reduce imports, raise exports and reduce the deficit trade balance the US faces.

This fact, I don’t believe, can be ignored.

The value of the dollar has not gotten much play in the press and elsewhere because the value of the dollar had declined for most of Mr. Trump’s time in office.

Now that time has changed.

I believe that Mr. Trump wants a weak US dollar. It remains to be seen how he might fight the rise in the value of the dollar that has taken place over the last three months, especially, if the Federal Reserve continues to pursue rising interest rates and a shrinking balance sheet.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Doneonbadstreet]

Trump has actually gone on record as being both for and against, a strong dollar.

[Michael Roat]

Kudlow is advocating a strong U.S. dollar policy. ""Devaluations and weak currencies do not create U.S. jobs. Instead, weakened currencies are accompanied by relative price changes, leading to inflation in the devaluing country". A weak dollar and accompanying high inflation would sow the seeds for the next Volcker type recession. Prolong the expansion and keep a lid on inflation with a strong U.S. dollar even if there are negative effects in emerging markets.

[Devil10777]

Artificial market manipulation only suppress the negatives for a bit and delay the turn of the economic cycle. Debt is debt....have to be paid back.

[Martin Schwoerer]

It is difficult to make predictions that concern an irrational actor. There are so many possible logical results, but in addition there are some possible illogical things that could happen -- the unknown unknowns, as it were.

Trump could simply say, "the economy is fantastic now that I am President", and stop beating on the Dollar. Many of his fans are already making statements of that kind.

Then, he could stop worrying about the Dollar, assuming he knows a strong Dollar is deflationary. Since the tax cuts and the trade wars are inflationary, a strong Dollar could be a counterweight that might also stay off some the Fed's planned rate hikes.

Then, he might start bashing the Dollar again, but already the markets should know they have to take anything Trump says with a grain of salt. Actually, his words might be a good counter-indicator by now: when Trump bashes Amazon and the stock subsequently falls, buy Amazon, because he is mostly talk and very little action, to put it politely. Dollar, wash, rinse, dry, repeat.