New US policies send dollar higher

For two decades, successive US administrations have professed their commitment to a strong dollar. Treasury secretaries tend to say that it reflects a healthy economy and supports investment. What they are generally assumed to mean is that the US will not seek to devalue its currency to help exporters or ease its debt burden.

In this, as in so much else, Donald Trump appears ready to break with convention, complaining that the exchange rate is “too strong” for US companies to compete with China and adding, more ominously, that the US might need to “get the dollar down” if tax policy sends it higher. Rather than threatening intervention, however, he needs to realise that it is his approach to economic policy that is fuelling appreciation.

True, the dollar has been trading for the past year at its highest levels in more than a decade. Yet this has nothing to do with currency manipulation — indeed, Beijing has been doing its utmost to prop up the renminbi. Instead, it reflects the relative dynamism of the US economy, which has brought the Federal Reserve far closer to restoring “normal” monetary policy than its peers. This divergence was underscored last week by Janet Yellen’s warning of a “nasty surprise down the road” if the Fed waited too long to raise rates.

If traders continue to buy the dollar, they will be betting on Trump’s plans to turbocharge US growth, through cuts to income and corporate taxes, deregulation and infrastructure spending. Such stimulus in an economy close to full employment could well impel the Fed to raise rates more swiftly, resulting in the combination of loose fiscal and tight monetary policy that made the dollar uncomfortably strong in the early Reagan years. If Trump wants the currency to weaken, he will need to abandon his impulse for protectionist policies that pump up US growth at the expense of the rest of the world. London, January 23.