Donald Trump wants a weaker dollar. What are his options?
All come with their own drawbacks
In September 1985, eight months after Ronald Reagan, America’s 40th president, began his second term, finance ministers and central bankers from America, Britain, France, Japan and West Germany met at the Plaza Hotel in New York. They discussed ways to bring down the value of the dollar, which had risen by nearly 50% on a trade-weighted basis between 1980 and Reagan’s second inauguration. Other countries had expressed alarm; the American trade deficit had ballooned. After the group announced that “orderly appreciation of the non-dollar currencies is desirable” and that they were ready to “co-operate more closely to encourage this”, the dollar plummeted. By the late 1980s, it was back where it traded in 1980.
Despite the seeming success of the “Plaza Accords”, currency intervention fell out of favour. Desire for control over monetary policy, as a way to keep inflation low, took precedence. It is infeasible for a country to have an independent monetary policy, an open capital account and a fixed exchange rate; even going for two of the three, and influence over the third, is not much easier. Currency markets are vast, deep and liquid. Time and again foreign-exchange traders have beaten into submission policymakers who have dared try to push them around, in either direction.
Yet this may not stop a second Trump administration from trying. Donald Trump likes most strong things—strongmen, strong borders, strong China policy—but not a strong currency. “One would think that I would be thrilled with our very strong dollar,” he said in 2019, “I am not!”, explaining he thought it undermined American industry. He is joined in this dislike by J.D. Vance, his new running-mate. “When I survey the American economy...I see our mass consumption of mostly useless imports on the one hand and our hollowed-out industrial base on the other hand,” he told a Senate hearing last year, before asking Jerome Powell, chair of the Federal Reserve, if there were downsides to having the world’s reserve currency.
What tactics could a Trump-Vance White House use to bring down the dollar? A repeat of the Plaza Accords—surely this time at the Trump International Hotel, on the other side of Central Park—is unlikely. They were agreed, in part, as an alternative to levying tariffs or other trade-protection measures on allies, which were desired by Congress. America’s trading partners are far more varied, numerous and hostile than in the 1980s. Fewer would be willing to help America out this time round.
Made in China
The Treasury could instead act of its own accord, selling dollars to buy foreign currency. But this might be expensive. From 2014 to 2017 China, which has robust capital controls and a thinner foreign-exchange market, spent $1trn, or 3% of GDP, a year trying to support the value of its currency. America is running a large budget deficit. Borrowing vast sums only to buy up foreign currency might not appeal, especially if funds are restricted by the debt ceiling and could finance tax cuts.
Perhaps Messrs Trump and Vance will try to coerce the Fed into action. Independent monetary policy is not something Mr Trump has ever cared much about. In his first term he often took to social media to chastise Mr Powell for being slow to cut interest rates, criticising him for having “no guts, no sense, no vision”. If the central bank could be nudged into printing dollars or lowering rates, that would probably help bring down the value of the dollar. Yet it is unlikely Mr Powell could be bullied into doing this, not least because it would almost certainly cause inflation, which he is required to keep low and stable. Firing Mr Powell, and replacing him with a more pliable chairman, might not be legal.
Some kind of capital control is the only other tool. It is unthinkable that America would implement the kind of restrictions that China has in place, but it could make flows of capital a little less free, such as by imposing a tax on foreign purchases of American financial assets. This idea has been floated by Robert Lighthizer, Mr Trump’s trade representative during his first term, as a tool to bring down the trade deficit. It, too, might have unwelcome consequences, including pushing up government-bond yields or pushing down stock prices. Given that Mr Trump likes issuing government debt and takes pride in a strong stockmarket, this could put him off.
If a second Trump administration simply does nothing, it might even get lucky. The jury has long been out on whether it really was the Plaza Accords that drove down the dollar. The currency’s strength in the early 1980s was encouraged by the Fed’s war on inflation, which it fought with eye-watering interest rates of almost 20%. By the end of the decade the battle was won, and rates had been cut sharply. A similar story seems to be playing out in America now. After more than two years of tight monetary policy, inflation at last appears to be subsiding. Rate cuts—and currency weakness—may soon follow. ■
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