Donald Trump’s dollar follies
If ever there was a policy area where President Trump’s actions were completely at odds with his objectives, it has to be his dollar policy.
President Trump clearly would like to have a weak dollar in order to level the international playing field and give a boost to U.S. exporters. With that goal in mind, he continually harangues the Chinese and the Europeans for alleged exchange rate manipulation to gain an unfair competitive advantage.
He also keeps heaping opprobrium on Federal Reserve Chairman Jerome Powell for maintaining U.S. interest rates too high, and he chastises European Central Bank (ECB) president Mario Draghi for keeping European interest rates too low as a tool to weaken the Euro. He does so knowing that relative interest rates play a major role in currency movements.
Yet, at the same time that Trump tries to talk the dollar down, he pursues an irresponsible budget policy and an “America first” trade policy that has exactly the opposite effect of keeping the dollar strong. As a result, over the past year, while Trump has huffed and puffed about the need for a weak dollar, the dollar has kept appreciating in value.
One of the main pillars of President Trump’s macroeconomic policy has been the massive unfunded tax cut he signed in 2017. According to the Congressional Budget Office, that tax cut will cause the U.S. budget deficit to balloon to around 4.25 percent of GDP over the next decade, up from an average of below 3 percent of GDP over the preceding 50 years. It will also cause the U.S. public debt to rise by around $1.5 trillion over the next decade, to over 90 percent of GDP by 2029.
By choosing to allow the budget deficit to balloon at this late stage in the economic cycle and at a time that the unemployment rate is at a 50-year low, Trump has left the Federal Reserve with little option but to keep interest rates higher than they otherwise might have done in order to fulfill its inflation mandate. This makes it all the more unfair that Trump should now be blaming Jerome Powell rather than himself for the dollar’s unwanted strength.
Another main pillar of President Trump’s macroeconomic policy has been his relentless pursuit of an “America first” trade policy. This has included the widespread imposition of aluminum and steel import tariffs as well as tariffs on a big part of China’s exports to the United States. It also has included the threat of more generalized and punitive import tariffs on China as well as a 25 percent import tariff on European and Japanese automobiles.
An unfortunate, yet predictable, consequence of Trump’s “America first” policy has been a marked slowing in international trade growth and a generalized weakening in manufacturing activity abroad. That in turn has prompted central banks abroad, including the European Central Bank, to loosen their monetary policies to respond to economies flirting with recession and with undesirably low inflation rates.
The fact that his “America first” policy might have left central banks abroad with little option but to signal lower interest rates ahead has not stopped Trump from hauling these central banks over the coals for loosening their monetary policies to cheapen their currencies.
Making this criticism all the more hypocritical is the president’s repeated calls for interest rate cuts at home to provide the U.S. economy with more monetary policy support. This is all the more so the case considering that he is calling for such support at a time when the U.S. economy is much less in need of policy support than are those economies abroad.
The “America first” policy has also contributed to the dollar’s strength by sowing uncertainty in global financial markets. That has had the effect of causing foreign money to flow towards the dollar in search of a safe haven against such uncertainty. That in turn has bid up the dollar’s value.
Sadly, the Trump administration is not known as much for acknowledging its policy mistakes as it is for doubling down on failed policies. That makes it all too likely that when the dollar continues to rise as a result of relative economic weakness and of unsettled financial markets abroad, the Trump administration will double down on its “America first” policy. If it does so, we could very well be on the way to the destructive beggar-my-neighbor and currency war policies of the 1930s.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.