Trump and the Dollar: They’re just not that into each other

November 18th, 2016 at 12:20 pm

I’ve been meaning to write about this but Neil Irwin beat me to it, so let me add a few points to Neil’s fine piece, along with a bit of data.

As the figure below shows, since the day before Donald Trump become the president-elect, the Wall St. Journal’s dollar index is up about 4 percent. The reasons are varied and one must be careful to not over-interpret short-term currency movements, but the post-election blip is actually a continuation of a longer-term trend. Broad indexes of the dollar against a basket of international currencies are up 20-25 percent since mid-2014.

Source: WSJ

Source: WSJ

For one, we’re growing faster than most other advanced economies and that makes the dollar a relatively attractive investment. While central banks in Europe are holding interest rates at zero if not going negative, our Fed is slowly but surely beginning a campaign to “normalize” rates. That in itself raises the value of the dollar, but importantly, it also draws in more capital flows from abroad, seeking safe American assets. These flows also pressure the dollar.

And then there’s Trump’s expansionary fiscal plans along with his protectionism and the alleged Mexican wall. Those too push up the dollar, against which the peso has been particularly sensitive–and inversely correlated–to Trump’s rise.

The Chinese yuan (accounted for in all the measures noted above), which just hit its lowest level in eight years, is also particularly germane in the Trump’s economic cosmology. It’s decline appears to have more to do with internal Chinese economics, including a downshift in growth, low interest rates, and an asset bubble (which has prompted some Chinese investors to move their assets abroad—part of the capital outflows noted above), than with Trump. But, of course, Trump railed against Chinese currency depreciation in the campaign, so this latest trend could easily get under his skin.

Source: WSJ

Source: WSJ

Another interesting problem for Trump in this space derives from one of his economic advisers, David Malpass. I’ve known David for years and enjoyed debating him on these issues, but he’s as hard money/strong dollar a guy as you’ll meet. Here he is a decade ago arguing the very non-Trumpian case that we should “embrace” the trade deficit!

As Neil points out, using basic rules of thumb about the relationship between the appreciating dollar and the trade deficit, “Mr. Trump’s pledge to eliminate the $500 billion United States trade deficit would have just become $180 billion to $270 billion harder.”

Closing the loop here is the relationship between the stronger dollar, higher trade deficit (which is exclusively in manufactured goods; we have a surplus in services), and manufacturing jobs. Here too, there are of course more moving parts than just exchange rates, but since the dollar began to appreciate in mid-2014, employment growth in our factories has essentially flatlined.

Simply put, a stronger dollar, while always the stated preference of the US Treasury (whether they really mean it or not is another story), is no friend of Trump’s. That could ultimately lead him to beat up on the Fed for raising rates and further driving up the dollar, or even to think about ways in which the president can block capital flows into our country.

In other words, stay tuned.

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5 comments in reply to "Trump and the Dollar: They’re just not that into each other"

  1. John Densmore says:

    Growth hasn’t flattened, but the way it is calculated has flattened because of price related to domestic oil extraction.

  2. Kevin Rica says:

    Bismark once said that a fool learns from his mistakes, but a wise man learns from other people’s mistakes. Let’s see if Trump has learned from Malpass’ mistakes.

    But on the other hand, are you sure that Malpass is really a Trump advisor? Everyone in Washington with a twitter account is claiming to be one of Trump’s advisors.

    • Jared Bernstein says:

      I mean, if giving the president-elect advice makes you an advisor, then I’m one too. The difference being that he doesn’t listen to me.

      See cover story of WSJ today for more on $’s appreciation.

      You heard it here first: If this trend continues, I’ll bet team Trump uses capital controls at some point. Which wouldn’t be crazy.

      • Kevin Rica says:

        If he either used capital controls or stopped incentivizing capital movements with tax breaks and investment treaties, would that make me a presidential advisor?

      • Kevin Rica says:

        The WSJ did just run an article saying Malpass is an advisor. Apparently he is not a former GS employee, he worked for Bear Sterns.

        NB, the current appreciation of the dollar is not happening on Trump’s watch. It’s the Rubinesque stong dollar.