Dethroning 'King Dollar': Trump Could Weaken the Greenback, but will Most Likely Leave this Job to the Fed
Image © White House
- Trump may want weaker USD but not likely to intervene
- Fed more likely to keep currency cheap instead
- Easing cycle could speed up to facilitate devaluation
Donald Trump would like a weaker Dollar, arguing that the 'strong' Dollar is hurting American exports and is the most important factor in the United States' large trade deficit.
It would greatly help increase the competitiveness of U.S. exports and support the manufacturing sector, all key policy issues seized upon by Trump in his first term and issues he is only likely to press harder on heading into the next election cycle.
Indeed, the Dollar might be more of a talking point on the campaign trail in 2020, not just for Trump but for opposition presidential candidates too.
Democratic contender Elizabeth Warren, a U.S. senator from Massachusetts, recently called for “more actively managing our currency value to promote exports and domestic manufacturing.”
While politician's clearly would welcome a weaker Dollar, how such an outcome might be achieved is debatable.
"Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn't have even considered this question. But under this new mercantilist U.S. regime, who knows?" says Chris Turner, an analyst with ING Bank. "Given Washington's desire to address the US trade deficit and boost domestic competitiveness, we think it now makes sense to consider the tools that President Trump has at his disposal to keep a lid on Dollar strength."
Analysts at ING have noted five ways the U.S. administration could intervene in currency markets to weaken the Dollar:
- US FX intervention and building out US FX reserves
- Changing the rules of the game for the Fed
- Ongoing jawboning and talking down of the dollar
- Pressuring major trading partners to strengthen the currency
- Creating a US Sovereign Wealth Fund
While there is clearly scope for the U.S. administration to get involved in currency markets, currency analysts are of the opinion the President will likely leave the lion's share of work to the Federal Reserve.
The U.S. authorities are unlikely to directly intervene in FX markets, says Adarsh Sinha, co-head of Asia FX at Bank of America Merrill Lynch (BoFAML), preferring softer policy options instead.
It is more likely that the U.S. Federal Reserve will use existing tools to create the conditions for a decline in the Dollar, potentially by speeding up its easing agenda and cutting interest rates more rapidly than expected.
Lower interest rates would weigh on the U.S. Dollar by reducing net capital inflows, by making the U.S. a less attractive destination for foreign investors to park their money.
Nor is it likely the Trump could persuade major powers to sign up to a ‘Plaza Accord’ type agreement.
The Plaza Accord was a historic agreement signed by the G-5 to weaken their currencies versus the U.S. Dollar. The idea was to rebalance trade in favour of the U.S. The agreement essentially legalised currency manipulation in favour of USD.
It is unlikely major powers would sign a similar accord now though, says BoFAML’s Sinha.
“It would be unprecedented if they went at it alone. Because I think it is very hard for them to have a Plaza Accord kind of situation. Simply because I think it is very difficult for countries like Japan and the Eurozone to commit to stronger currencies,” says the strategist.
Whilst not ruling out direct intervention by the U.S. altogether policymakers have more subtle tools at their disposal for pushing down the Dollar.
“I think before they even think about intervening, they have other tools at their disposal. Obviously, there is verbal rhetoric, which there is plenty of these days from the White House but there is also the Fed,” says Sinha. “Of course the Fed has already signalled a strong easing bias and it has weakened the Dollar. Never rule out or underestimate the power of the Fed, through its dovish policy actions to weaken the U.S. Dollar.”
The Fed is technically independent of the White House so to suggest it could be directly swayed by Trump is highly questionable.
Indeed, there appears to be little love lost between the Chairman of Fed Jerome Powell and President Trump, suggesting the latter has little power to influence the former.
However, even the Fed has a commitment to maintaining growth, a fact clearly underlined in their recent meeting statement in which they said they would do whatever was necessary to maintain the economy’s current growth trajectory. Influencing the exchange rate could well be one way to help stimulate growth, whether explicitly or implicitly.
This leads Sinha to speculate that all the talk of intervention combined with signs the real economy is slowing down could lead the Fed to speed up its easing agenda, rather than slow it down.
“So ultimately I think the Fed does deliver on rate cuts and cuts a bit quicker than other central banks around the world, and given that the U.S. Dollar Index - a broad value of overall Dollar performance - has broken through its 200-day Moving Average, maybe it doesn't need to go as far as intervention at this point,” says the strategist.
Above: Technical analysts would argue that breaking below the 200-day moving average bodes for further Dollar weakness.
U.S. policymakers are likely to become ever more vigilant about the currency as the slowdown takes root.
“I certainly think policymakers in the U.S. particularly in the White House will keep a close eye on the currency, and will, in some ways, if it strengthens too much, think about other policy options to try and prevent that,” adds Sinha.
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Verbal Rhetoric More Effective in Bear Market
The sea-change in outlook caused by the Dollar Index breaking below its key 200-day moving average (MA), which is considered by many analysts as a line in the sand above which prices remain in a bull trend and below they are bearish, also suggests the ‘nuclear option’ of intervention may become increasingly unnecessary.
When a currency is in a downtrend verbal intervention aimed at weakening the currency tends to have a much greater impact than when the currency is trending up, according to Alan Ruskin, head of G10 FX at Deutsche Bank.
This suggests Donal Trump’s negative tweets about the Dollar and U.S. interest rates may start to have more of an impact now than previously.
“The president’s tweets on the USD have the potential to have much more lasting impact in the coming election year,” says the analyst.
Indications of slowing global growth are setting the scene for what is starting to look like almost coordinated central bank largesse, as most G10 and even emerging market central banks have cut interest rates in the last two months or at least discussed the possibility of cutting them.
Some have described this as a ‘race to the bottom’ for interest rates, but Ruskin goes further and says macro conditions “are nicely set for what has colourfully been described as a ‘currency war,’ a currency ‘race to the bottom,’ or more specifically, weaker real traded-weighted indexes.”
There is a possibility the G-20 meeting started today could provide the forum for a re-commitment and reaffirmation of rules against currency intervention, including verbal intervention.
Such an affirmation would also be a rebuke of “currency-specific tweets,” Ruskin says, at least, “in theory.”
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