President-elect Donald Trump has a new constituency to care about: the currency market. Trump built his victorious presidential campaign in part on promises to reduce the size of the US trade deficit and bring factories from Mexico and China back to America’s shores, providing relief for disaffected communities ravaged by job losses. In this regard, the relative strength or weakness of the US dollar could magnify or serve as a countervailing force for any protectionist trade measures the new administration pursues in attempting to achieve these goals, with the potential to spur action from the new administration.
“What we believe is almost assured is that the US dollar will not be subject to benign neglect” over the next four years, says Deutsche Bank AG Macro Strategist Alan Ruskin.
The US Dollar Index is up more than 2 percent since the election, on hopes of fiscal stimulus buoying growth stateside. However, this dynamic also points to rising imports going forward, as well as a decline in the competitiveness of American exporters.
“It is possible that a strong dollar will be worn by the coming administration as a badge of honor – a signal of global confidence in ‘Trumpism,'” writes Ruskin. “Much more likely, because it is more consistent with trade and manufacturing objectives, policymakers will wish to keep dollar strength in check.”
At the very least, Trump’s team should take care to steer clear of Rubinesque statements about a strong US dollar being in the nation’s best interests, according to the strategist. Measures to push back against greenback strength could involve jawboning the dollar lower, directly intervening in foreign exchange markets, or using monetary and fiscal policy to engineer currency weakness.
“The real broad trade-weighted dollar index is roughly 10 percent below levels where most administrations would be encouraging of a USD correction, and we doubt a Trump administration will be less interventionist than its predecessors going back to Reagan,” he writes.
If this index rose to levels about 20 percent above its longer-term moving average, that could trigger intervention from the new administration, Ruskin reckons.
The strategist cited five considerations the administration will be focused on regarding the greenback including its rate of appreciation, evidence that the exchange rate is helping or hurting the trade deficit and manufacturing sector, as well as whether U.S. dollar strength is perceived as a byproduct of losing a “currency war.”
He cautioned that the advisers Trump surrounds himself with will be key in deciding how, or even if, the new administration works to keep the greenback on its back foot.
“Given the administration’s trade pejoratives, the logical course is to make it clear that while a strong dollar is in the U.S. interest, an overly strong dollar is not, and then use subtle verbal signals to resist too much dollar strength based on the criteria discussed above,” Ruskin concluded.
“This approach does require verbal discipline,” he deadpanned.