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Strong US dollar a threat to Trump campaign pledges

Friday, April 14, 2017 - 17:08

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President Donald Trump takes credit for revitalising the US economy even though he has not yet been in office for 100 days.

[WASHINGTON] President Donald Trump takes credit for revitalising the US economy even though he has not yet been in office for 100 days.

But the new president's boasts of breathing life into the world's biggest markets may come with an unwelcome corollary: a rising US dollar and the Trump campaign promises it threatens.

Mr Trump acknowledged as much this week in a Wall Street Journal interview.

"I think our dollar is getting too strong and partially that's my fault because people have confidence in me," he said.

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"That will hurt ultimately."

Since his shock rise to the White House, major indicators have continued to portray an economy in increasingly good health. Consumer sentiment and Wall Street have both hit successive records, boosted by Mr Trump's promises of tax cuts, infrastructure spending and slashed regulation.

As a result, investors have pumped cash into American equities markets, driving up a dollar which had already been on the rise. It is up more than six percent against a basket of six major currencies in the last year.

"The dollar is high because the US economy is a stronger performer right now than any other advanced economy," said Barry Bosworth, a senior fellow at the Brookings Institution.

Mr Trump cannot claim credit for all of this. By hiking its benchmark interest rates twice since December, the Federal Reserve has also bolstered the US dollar by tightening the flow of credit and enticing investors with the prospect of higher returns.

To be sure, a strong US dollar is not all bad: it lowers import prices while also supporting access to lower-cost credit by supporting the inbound flow of cash.

On the other hand, it hurts American exports and directly threatens Trump's campaign pledge to correct the US trade deficit, particularly in the manufacturing sector, which has withered from Chinese and Mexican competition.

"There's a contradiction that goes back to one of the core messages of his campaign," said Nathan Sheets, who served as under secretary for international affairs at the US Treasury under former president Barack Obama.

Eswar Prasad, a professor at Cornell University, said Mr Trump was acknowledging he had arrived at a certain impasse.

"Mr Trump seems to recognise the economic reality that a stronger dollar will make it harder to achieve some of his policy objectives," he said.

Since the mid-1990s, the United States has consistently defended a strong US dollar policy, saying it stood for a robust, attractive economy.

But with one eye on the colossal US trade deficit, Trump sees things a little differently.

"Look, there are some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good," he told The Journal.

Still, Mr Trump has only narrow room to maneuver.

His remarks on the US dollar sparked a selloff against the euro but such a strategy is unsustainable.

"Comments by presidents and finance ministers about exchange rate have a very short life expectancy," said Bosworth of Brookings.

With several vacancies open at the Federal Reserve, Mr Trump could be tempted to appoint central bankers who favor lower interest rates in the hope of diluting the US dollar's value.

But such an unprecedented tack would risk angering Congress, which confirms Fed nominees.

In reality, Mr Trump's only hope to dull the effect of the strong US dollar is to use import duties to make foreign goods less competitive.

And, according to Mr Prasad, Mr Trump's remarks suggest his administration could be ready "to get tough on trade".

But first Mr Trump should clarify his administration's position. In late February, Treasury Secretary Steven Mnuchin said he supported a strong US dollar in the "long term", which he said should remain a stable reserve currency.

"The new administration is still working through its thinking," said Mr Sheets.

"It remains to be seen which of those two narratives the administration will ultimately adopt."

AFP

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