The dollar was the second worst performer in 2017 among major currencies after the New Zealand dollar, and its drop was the steepest in more than a decade despite three interest rate hikes and the passage of Trump’s tax reform, which could logically be expected to drive the dollar’s value upward.
This significant drop has happened for a number of complex reasons which may include the dollar’s popularity as a funding tool for foreign companies and governments. Nevertheless, Trumps’s effect on his country’s global standing is seen as a key driver of the dollar’s decline.
However, anyone expecting Trump to make an effort to reverse this decline will be sorely disappointed. The president has made no secret of his wish for a weaker dollar, and in fact it appears that he is actively encouraging it.
The U.S. Treasury has been flooding the market with short-term debt that neither domestic nor foreign investors are very interested in buying. The Federal Reserve is capping the yield on the debt with its promises to raise rates gradually and to keep rates below long-term levels for some time.
Taken together, we have a surge of short-term issuance at very negative real rate, fitting perfectly with Trump’s desire for a weak dollar.
Last week we mentioned that in the past Trump declared that the U.S. dollar is “too strong.” He also added, “Our companies can’t compete with [China] now because our currency is too strong. And it’s killing us.”
“This is the first time we have a president-elect say the dollar has gone too far,” Marc Chandler, a Brown Brothers Harriman strategist, told CNBC.
These comments by Trump about the dollar are particularly significant because they represent a break with established thinking that believes a strong U.S. dollar is a good thing. This thinking trusts that a strong dollar keeps inflation and interest rates in check and helps American consumers have better buying power abroad.
Part of what guides Trump’s remarks is the fear that the might of the U.S. dollar—which has been steadily rising since 2014—will make American exports less attractive in foreign markets, particularly as other currencies remain relatively weak.
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