Trump turns around: Dollar strength is “a great thing” | 05/23/20

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Trump: “It’s a great time to have a strong dollar”

In an interview with Fox News in the middle of May, US President Donald Trump was suddenly full of praise for the strong US dollar. Dollar strength is “a great thing” and “a great time to have a strong dollar,” Trump said. Everyone is about to invest in the dollar and the United States in order to enjoy the security of their country, the US president continued to enthuse. In this situation, he also attributed a significant part to himself: “Everyone wants to be in the dollar because we held it strong. I held it strong,” said Trump. He admitted that a strong dollar made international trade difficult for US companies – which was also his original concern – no longer attached too much weight to this fact. Instead, he assesses dollar strength from the “country’s perspective and inflation”. “If you don’t have inflation, then you have no problems,” was his conclusion.

After the interview was published on Thursday a week ago, the dollar rose again somewhat. However, analysts saw the exchange rate rise less due to Trump’s newly discovered love of the strong US dollar. For example, Credit Suisse analyst Shahab Jalinoos said, according to the Financial Times, that market responses to Trump’s comments like this were minimal, precisely because he was known for his inconsistency. Forex strategist Kathy Lien from BK Asset Management told MarketWatch that “Trump’s dollar outlook has no real impact on its direction.” She believes the US dollar was more likely to rise due to tensions with China – and because Fed chief Jerome Powell had clearly spoken out against negative interest rates in a comment on Thursday.

Does Fed policy set the course for Trump’s statements?

In fact, the Fed’s policy in particular is likely to trigger Trump’s turn away from his call for a weak US dollar. Because in the past he often had the demand for one with the dollar criticism Rate cut connected. In order to support the US economy in the corona crisis, the Fed has meanwhile reduced key interest rates to almost zero. Trump also praised this in an interview with “Fox News”: “You know that we are not paying any interest right, right. It has never happened before. We pay so little,” said the US President, who is with another Opportunity nevertheless spoke for negative key interest rates. However, the dollar is currently attractive for investors precisely because the Fed has not yet introduced negative interest rates. Macquarie Futures analyst Thierry Wizman said in a recent study, MarketWatch, that the US dollar, unlike many of its major rivals, still has a floor, despite the Fed’s moves in recent weeks to meet international demand for the US currency. This gives the dollar an advantage over other currencies and increases its attractiveness as a safe haven.

Analysts are puzzled about Trump’s change of direction

However, some analysts suspect a new agenda behind Trump’s suddenly positive attitude towards the strong US dollar. Currency strategist Mark McCormick of Canadian financial services provider TD Securities told the Financial Times, for example, that the election campaign in the United States could be an important factor. He believes the strong dollar could become a kind of campaign slogan to emphasize the special position of the United States even in times of recession and extreme unemployment. “See how great our dollar is doing. That means America is doing well,” said McCormick, referring to a possible campaign slogan by the Trump administration.

However, other experts do not believe that there are such broad considerations behind the statements of the US President. “Trump shot from the hip or noticed that he couldn’t weaken the dollar, so he accepts it,” said John Doyle of forex service provider Tempus to Reuters. Analysts interviewed by MarketWatch also indicated that Trump is now hanging his flag on the wind as he may have realized that it is pointless to fight the market.

But no matter what is behind Trump’s about-face, according to Seema Shah, chief strategist at Principal Global Investors, it is increasingly in Trump’s interest to greet the strong US dollar with open arms. Because the focus of investors has shifted in the Corona crisis: from international competitiveness to financing deficits that shoot up. “It is of the utmost importance that investors do not lose faith in the American financial system and its ability to pay debts,” Shah told the Financial Times. Therefore, a strong dollar policy is now appropriate.

Economists warn of the US dollar being too strong

But the strong greenback is currently not as well received everywhere as it is with President Trump and the analysts mentioned. Economists in particular warn that a dollar that is too strong is the last thing the global economy needs at the moment. “Too high a rating is currently not in anyone’s interest,” warned Adam Posen, according to “Bloomberg”. Poznan previously worked for the Bank of England and is now President of the Peterson Institute for International Economics in Washington. Maurice Obstfeld, former chief economist at the International Monetary Fund (IMF), also pointed out the dangers of an extremely strong dollar. “A very strong appreciation could be a disaster for countries that have a lot of debt in dollars,” Obstfeld told Bloomberg. Emerging economies in particular, which borrowed in US dollars, could face difficulties as they suffer from the economic and export slump caused by the Corona crisis, but at the same time have to service higher borrowing costs as their national currency is increasingly underperforming against the US dollar Pressure device. In the worst case scenario, the negative impact of a dollar that is too strong could not be confined to the emerging markets, believes Obstfeld, who is currently a professor at the University of California, Berkeley. “There may be situations in which a very strong dollar appreciation has a destabilizing effect on the entire global economy,” warned the former IMF economist. However, it is questionable whether Trump will take such warnings to heart as long as he believes the US can shine with its strong currency.

Editorial office finanzen.ch

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Image source: Chip Somodevilla / Getty Images, Ralph Freso / Getty Images, John Moore / Getty Images, Scott Eisen / Getty Images

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