The US dollar is expected to surge upward now that President Trump is in the office; but high volatility is expected to accompany it as new policy changes are implemented by the new administration. The day after Donald Trump won the elections the dollar rallied upwards. However, come January 2017 the greenback started to fall on what analysts attribute to profit taking by speculators who had benefited from the rally between November 2016 and December 2016.
After President Trump gave his inauguration speech on Friday 20th January 2017 which was interpreted to be more generic without any specifics on tangible policy actions going forward, the dollar edged downwards. This reflected investor’s disappointment and increased sentiments of uncertainty since most of them had been expecting President Trump to lay our clearly his plans on fiscal spending, tax cuts and the regulatory reforms he intends to introduce during his tenure in office. The one thing that came out clearly from President Trump’s inauguration speech is that he was going to take the protectionist economic strategy in his bid to make America great again.
Trumps economic growth plans
To achieve his protectionist goals, President Trump will need a weak US currency which is contradicting the current strong US dollar. A few days before his inauguration, Trump had implied that he would prefer a weaker greenback when he said that “Our companies can’t compete with them [Chinese companies] now because our currency is too strong. And it’s killing us.” His sentiments resulted to the US dollar softening with analysts expecting that rather than reverse the current bullish trend for the dollar, Trump presidency will slow down the rising dollar value.
Trump made a lot of promises about making America great again through job creation in the US by promoting the buying of goods and services produced by local businesses and by having more local businesses hiring US citizens. Increased money supply within the economy through borrowing from local financial institutions will play a big role in supporting the expected consumerism, while helping the financial sector grow as well. However, the government will have to put in place proper regulatory reforms and ensure personal credit monitoring; in order to prevent the repeat of the 2008 global financial crisis where subprime loans to unverified borrowers led to the collapse of the global financial sector.
In addition to increasing local consumption, Trump will need to boost US exports in order to achieve the 4% growth rate he is targeting. This is due to the fact that local consumption within the US alone cannot guarantee enough demand to double growth from the current annualized US GDP growth rate of 2%.
Why a weak currency is good for Trump
The above objectives of the Trump administration build a good case why a weak currency will be the preferred option going forward. To boost US exports, the greenback will need to be weaker compared to its global peers in the international trade markets so that US goods and services become cheaper and hence increase their demand in international markets. With the increased sales, economic growth and job creation back home is achieved as more corporates record high profits and expand their operations to serve the foreign markets’ demand. This strategy has been used by China successfully and the US might follow the same path under Trump administration.
A weaker greenback also results to relief for debtors as it boosts inflation from the increased money supply and expenditure from the consumers, corporates and even the government itself. As the inflation goes up, the value of the debt remains the same hence making it easier for local borrowers to repay their debts in the local currency. On the other hand, repaying foreign debt becomes more expensive in a weak local currency regime; thereby pushing more credit seekers to borrow locally and hence supporting growth within the local debt market.
By stating that “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs,” Trump was setting the stage for currency competitions going forward with US trade rivals such as China and Mexico.
Trump believes that “Protection will lead to great prosperity and strength,” but economic analysts differ with him on this based on the retaliatory actions from the concerned trade rivals. By weakening the greenback in order to get more exports from the US getting into the international markets, Trump will be provoking his counterparts in other parts of the world to do the same thing. In the end, the currency wars will lead to more protectionist strategies across the world resulting to a slow-down in global economic growth and hence the original objective of growth will have been aborted in pursuit of populist ideologies.