Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn’t have even considered this question. But under this new mercantilist US regime, who knows? We identify five ways in which Washington could try to engineer a weaker dollar.
White House needs a weak dollar for US trade policy consistency
While the first sentence of the above Larry Summers quote is certainly true, the second sentence is up for major debate. It may be difficult for investors to reconcile (i) a White House adamant in narrowing its trade deficit by boosting US competitiveness and (ii) broad-based USD strength. In theory, the two cannot coincide simultaneously.
Yet, whilst the White House has enforced sizeable tariffs on major trading partners in 2018, the dollar has broadly strengthened since April – with fundamental flows outweighing the uncertainty factor over Trump’s dollar policy (see our note USD: Trade War Trap). We suspect the USD’s recent strength – in particular against the Chinese yuan (CNY) – will have grabbed the US administration’s attention, not least as it is incompatible with their current mercantilist policy agenda (see chart showing FX performance since Trump’s inauguration). As we have seen in recent weeks, the President has ramped up verbal jawboning over a strong dollar and higher US rates as the currency has strengthened – suggesting that current USD strength may be at the upper bound of the White House’s tolerance level.
Dollar strength starting to move into White House jawboning territory
Dethroning the King: President Trump’s toolkit to weaken dollar
Given Washington’s desire to address the US trade deficit and boost domestic competitiveness, we think it now makes sense to consider the tools that President Trump has at his disposal to keep a lid on dollar strength.
Read the full article at ING: Dethroning the King: Five Ways Trump Could Weaken the Dollar | ING