Trump now says strong dollar is good, but markets beg to differ

Washington

JUST weeks after a surging dollar was causing havoc in world financial markets, US President Donald Trump has decided that a muscular US currency is a good thing after all.

"The dollar is very strong," he told a press conference on Friday. "And dollars - strong dollars are overall very good."

The comment marked a U-turn from the president's rhetoric for much of the past few years, in which he repeatedly called for a weaker dollar to aid US manufacturing companies and boost American exports. It also comes at a time when many economists say that the resurgent US currency is the last thing a global economy - knocked low by the corona-virus shock - needs.

"Over-appreciation now is in nobody's interests," said Adam Posen, a former Bank of England policymaker who is now president of the Peterson Institute for International Economics in Washington.

Investors seem to agree. The rapid run-up in the greenback last month was not only a symptom of a worldwide dash for cash by investors seeking shelter from the financial fallout of the Covid-19 pandemic; it was also viewed as posing dangers of its own.

That's especially so for emerging markets and developing countries that loaded up on dollar-denominated debt in recent years. Those countries faced a double whammy: collapsing demand for their exports due to the shutdown of huge swathes of the world economy, and rising costs to service their dollar debts as the greenback increased in value against their local currencies.

"A very sharp appreciation can be a disaster for countries that have a lot of dollar-denominated debt," said Maury Obstfeld, a former International Monetary Fund chief economist who is now a professor at the University of California at Berkeley.

Total dollar credit extended to borrowers, excluding banks, climbed to US$12.1 trillion by September, Bank for International Settlements data show. That's more than double the level of a decade before. It amounted to almost 14 per cent of global gross domestic product; the ratio back in 2009, during the financial crisis, was under 10 per cent.

The US currency has slipped back from its March peak, in part due to the efforts of the Federal Reserve to pump liquidity into the US and global economies.

The US central bank opened up dollar-liquidity swap lines with Brazil, South Korea and Mexico. It also established a temporary repurchase agreement facility to allow foreign central banks to swap any Treasury securities they hold for cash.

Despite those efforts the dollar is markedly higher than it was at the start of the year, before the coro-navirus shock.

In speaking to reporters on Friday, Mr Trump did allow that a strong dollar can hurt US manufacturing companies. But, unlike in the past, he also played up the benefits of a strong US currency. "Everybody wants to invest in our country," he said, pointing to Friday's stock market advance. "People want the safety of our country."

The money is pouring in even though US interest rates are at rock bottom levels, Mr Trump said. "We're paying almost zero interest, like in some cases zero," he said.

In highlighting the advantages of a sturdy greenback, Mr Trump in a sense reverted to the stance of past US administrations that viewed a strong dollar as being in America's interest.

But it may not be for the rest of world, at least for now. "There can be circumstances in which a very sharp appreciation of the dollar is destabilising for the entire global economy," Prof Obstfeld said. BLOOMBERG