Since Donald Trump was elected president, the value of the U.S. dollar is up about 4 percent against the currencies of our trading partners. And that “Trump bump” in the dollar is an extension of longer-term trend wherein the greenback is up 20 to 25 percent, depending on the basket of currencies to which you compare it, since mid-2014.
U.S. presidents, and especially their Treasury secretaries, are hidebound by tradition to profess their undying love for a strong dollar. Perhaps the new president will buck (hee-hee) this trend, because lemme tell you: The strong dollar, which makes our exports less competitive in foreign markets, is no friend of Trump’s.
During the campaign, Trump ran hard against the U.S. trade deficit, or exports minus imports, last seen at about $500 billion, about -2.5 percent of GDP. Our trade deficit is exclusively in manufactured goods; we have a surplus in services (financial services, entertainment, including royalty fees, intellectual property, airline fares). I raise that because the linkages among the trade deficit, the loss of manufacturing jobs and the dollar are what connects the trend you see in the figure to potential headaches for the next president.
Why has the dollar climbed? One reason, contrary to Trump’s relentless trashing of the U.S. economy, is that we’re doing better than other advanced economies, so currency traders would rather hold dollars than, say, euros. “Doing better” is not the same as “doing great,” but remember, our Federal Reserve is talking about raising interest rates while central banks in other developed markets are holding the interest rate they control at zero or even below (negative rates … go figure). Higher U.S. interest rates not only raise the value of the dollar but also pull in capital flows from the rest of the world as investors buy dollars, which are both a safe and appreciating asset, relative to other currencies.
Then, in a development that’s really got to be working Trump’s nerves, the Chinese yuan recently hit its lowest level in eight years. The yuan’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’s election. But he certainly railed against Chinese currency depreciation in the campaign, so he can’t be loving this ongoing depreciation in the yuan relative to the dollar.
The other factor pushing up the dollar right now is Trump’s expansionary fiscal plans. As I recently described in Politico, Trump’s infrastructure plan is a muddled giveaway to private investors. In its current incarnation, Democrats are unlikely to go along with it, and from what I’ve heard, Republican leadership isn’t that excited about it, either.
However, a big tax cut for the wealthy is almost certainly coming sometime next year. Markets expect such fiscal policy to boost inflation and interest rates, and that’s probably one factor behind the Trump bump to the dollar you see in the pullout part of the figure.
The inflation point is germane, because the Fed could push back on the climbing dollar by holding off on planned rate hikes. If, however, inflation is picking up, they’d be unlikely to pause.
Finally, the peso has been particularly sensitive to Trump’s rise: Trump up, peso down, as Mexicans assume our next president can’t be good for their economy.
End of the day, President-elect Trump can inveigh all day long against the trade deficit, but as long as the dollar remains high and rising, our exports will be more expensive for our trading partners and their exports to us will be cheaper. Over the past year, the real value of the dollar is up about 2 percent and manufacturing jobs are down 53,000. Go back to 2012, and the dollar was down 2 percent and we added about 160,000 factory jobs.
Obviously, there are more moving parts to these relationships — slow growth and weak demand among potential importers of our exports are in the mix.
But to the extent that team Trump cares about these issues, I don’t think they’re going to engage in a lot of nuance around them. He has talked a lot about big tariffs and ripping up trade agreements, but they won’t do much to reduce the trade deficit.
What will? Good question, and one I’ll turn to soon.