Trump talk aside, dollar will rise

You’ve got to hand it to Donald Trump: he knows how to confuse things.

A case in point is his recently expressed view on the U.S. dollar, published in The Wall Street Journal on Tuesday. In it, the president-elect opined that the greenback was “too strong.” He singled out the exchange rate against the Chinese yuan as an example, claiming that China was depressing its currency to inflate the U.S. dollar. “Our companies can’t compete with them now because our currency is too strong, and it’s killing us.”

OK, there’s no point quibbling over the yuan thing by noting that the reason for China selling hundreds of billions of greenbacks from its foreign reserves probably isn’t to prop up the yuan.

And it would just be inconvenient to note that while the U.S. does have a trade deficit with China, the bigger picture hardly shows an export sector that’s getting killed. In the third quarter of 2011, total U.S. exports of good and services, in constant 2009 dollars, were US$1.9 trillion; in Q3 last year, total exports were nearly US$2.2 trillion. On the surface, at least, that hardly looks like an export sector in deep doo-doo.

On the other hand, markets on Tuesday seem to have glossed over Trump’s China-bashing — it’s old hat now. What they really noticed was that he seemed willing to abandon America’s long-held strong-dollar policy, which dates back at least to the Clinton administration. That might be confusing, but it was especially so because it came from Trump — a man whose policies, or at least what we think we know about them, absolutely scream “stronger dollar.”

Investors took him seriously enough, anyway, to sell the greenback on Tuesday, when it hit a six-week low. (Correspondingly, the Canadian dollar took a decent little jump, too, no doubt boosting the vacation budgets of would-be snowbirds across the country.)

So are we seeing the end of the dollar rally, Trumpstyle?

Well, don’t count on it. For one thing, investors should probably apply a substantial discount to any signals Trump makes — he makes a lot of them, and they often conflict. His remarks about the currency might have been offhand, or more about anti-China rhetoric than a policy direction.

But even if he was serious about the stronger dollar, one wonders what he — well, especially him — could do about it.

You need only look at monetary policy. The U.S. Federal Reserve is on a clear tightening path, and Treasury yields have risen. Treasuries’ yield differential with other developed economy sovereign bonds — it’s about two per cent with German bonds, for instance — has become juicier for global investors, and the greenback will rise as their money pours in.

That’s the current state: Trump’s policies, if enacted, would just throw fuel on the fire. The U.S. economy is already growing strongly and at or near full employment, which is why the Fed raised rates in December. Trump has vowed to create millions of new jobs (somehow) and boost economic growth. If he succeeds, then the Fed will have to respond more aggressively and raise rates faster, which, again, would tend to lead to a stronger dollar.

His fiscal stimulus ambitions — we can’t call them plans yet — would have a similar impact on Fed policy and the dollar.

Tax cuts, infrastructure programs and higher military spending could add US$5 trillion or more to the U.S. national debt. How high could rates go to support all that borrowing? Rampant inflation could counter the currency impact of higher rates, but inflation expectations are still pretty subdued. Even a long-term 2.5-percent inflation rate is not going to send bond investors running for the hills.

Last but not least, there are Trump’s America First trade and tax policies.

His idea for repatriating corporate profits, for instance, would effectively be a purchase of trillions of greenbacks.

On trade, he told the Journal he didn’t much like the idea of the border tax adjustment congressional Republicans are touting, saying it was too complicated. (Which is a fair point.)

But given his comments on the dollar, you might have thought he’d point out one of the bigger issues with the idea: it would lead to more currency appreciation — by some estimates, as much as 25 per cent.

Then again, Trump’s own ideas on trade — like slapping a 35-per-cent tariff on imports from countries he doesn’t like — would amount to much the same thing: higher consumption of domestically produced goods and services, lower consumption of foreign production, and a higher dollar. If Trump somehow managed to get rid of America’s chronic current account deficit, which he seems to think is a big problem, the greenback could soar even more.

All this leaves investors, along with everybody else who doesn’t live in Trump Tower, wondering what the heck the next president of the United States is really going to do.

Obviously, we don’t know. My guess is that we will still see the U.S. dollar rally continue, whatever Trump does. So if you’re betting on the U.S. dollar weakening bigtime — well, I wouldn’t be booking that getaway in Boca Raton just yet.