President Trump determined to devalue dollar
The relentless appetite for the dollar goes on regardless of what Donald Trump or his politicians are up to. Tax cuts of $1.5 trillion plus possibly similar amount for infrastructure spending as promised during Donald Trump’s campaign is on its way to the congress for approval.
For sure it will be approved, possibly even bigger spending. Meanwhile, the
US budget deficit is ballooning further.
But who is going to pay for these spending?
International creditors and investors are always complaining about the huge US deficit but they don’t mind keep funding them. They are not worried because they know that the US government’s ability to bill it has never been in doubt. However, the only way for the US government to keep paying back its creditors is by issuing more US dollars and the only way to make the government’s deficit attractive is to devalue the dollar. Some Congressional Republican members once known for hating bigger budget deficits are now happy to see more government spending. International creditors be ready to fund more as the US government is looking forward to spending more in the coming years.
Just like businesses most governments do run budget deficits from time to time but living beyond ones means cannot be sustainable. The US government has been running budget deficits for a long time and to its credits it has never failed in paying its creditors and will continue to do so. However, there is a price to pay and unfortunately the price is paid by US creditors in the form of a devalued dollar. Throughout its history, consecutive US governments always wanted a strong dollar as they believed that a strong dollar is good for the prosperity of the country. I am not sure and I do not contribute to such an argument. Over the past 50 years, the dollar has been weakening years after years.
Now President Trump wants a much weaker dollar as he promised during his election campaign. He is already delivering on that promise. He believes that just like the US biggest trading partners i.e. China, Japan, and Germany a devalued dollar is the path to prosperity. Economic prosperity is about exporting and importing but for Trump it is about exports only. To be fair to him I think it is about time US’s major trading partners play to the same rules that determine international fair trades. Overall, the United Sates imports more than it exports and that is why the president is arguing for a weaker dollar.
The dollar weakness is a double-edged-sword that could be beneficial for the US economy and it should not be a reflection on a weaker US economy. While the US economy is weak by historical standards it is still growing faster than those of the eurozone, Japan and much of the rest of the world, except for China. For global investors, the US economy stands out against world economies. It has a stable political and legal system that protect international investors. A weak dollar makes US goods and services more affordable in comparison to the offerings of competitors. It also has the effect of increasing the value of corporate profits from overseas operations once it is translated into the dollar. In the likelihood of a weakening dollar, investors must think first to offset currency weakness and secondly how to benefit from it. While it will be difficult for the US economy to stand out relative to other developed economies for long period but it is likely that it will continue the outperformance for a while to come.
As for equity investors, a cheaper dollar means that they should overweigh their exposure to US equities, particularly to those companies that have very high export ratios. In general, US companies that have most of their business located outside the country will fare better by weakening US$. Finally, investors should give some thought to the impact of a weakening dollar on Investing in equities and the impact on returns, the ultimate decision should be based on company’s is fundamental factors, interest rates and profitability.