The weakening of the dollar
Signs are emerging that the U.S. currency may be losing some status in the age of Trump.
LONDON — It is the closest thing to a certainty in the global economy. When trouble flares and anxiety mounts, people who manage money traditionally entrust it to a seemingly indomitable refuge, the U.S. dollar.
Yet on Wednesday, in the hours after President Donald Trump’s threat to unleash “fire and fury” on North Korea if it continued to menace the United States, global investors sold the dollar. The same dynamic played out in June, as Saudi Arabia and other Arab nations imposed an embargo on Qatar, delivering a fraught crisis to the oil-rich Persian Gulf. And the dollar dipped in July after President Vladimir Putin of Russia expelled 755 U.S. diplomats, ratcheting up tensions between the two nuclear powers.
Since the beginning of the year, the dollar has surrendered nearly 9 percent against a basket of major currencies.
The dollar remains the dominant instrument for global trade, a role it is unlikely to surrender anytime soon. Yet those who trade in currencies see tentative signs that the dollar may be losing some status as markets grapple with the unorthodox actions of the man leading the country printing the money.
Trump’s presidency has been so full of departures from the norms of international relations that uncertainty has seeped into the calculation of America’s plans. That has subjected the dollar to additional skepticism, enhancing the fundamental factors pulling it down, from worries about the strength of the U.S. economy to improved fortunes in Europe and Asia.
The dollar has in some sense become an international medium of expression about the U.S. political environment. Its value offers a gauge of sentiment for Trump’s prospects in achieving his economic goals, as well as worries about his potentially impulsive declarations.
“At the margin, investors may be a little more cautious in treating the dollar as safe haven,” said Jeremy Cook, chief economist at World First, a London-based company that handles foreign exchange transactions. “Certainly, the sentiment toward the viability of the Trump administration has not helped. There’s the risk that at 3 a.m., Trump tweets something and the dollar gets hit.”
Before Trump was sworn in, many investors were buying into the socalled Trump trade, a bet that the new president’s plans for tax cuts, deregulation and a hefty dose of infrastructure spending would spur economic growth. This formulation has earned favor in the stock market. During the Trump administration, domestic shares have reached new highs, propelled by strong corporate profits and executives exuding optimism.
Yet the Trump trade was also a wager that the dollar would climb as investment flooded into the United States to exploit fresh growth opportunities.
Those expectations have been overwhelmed by the turbulence of the Trump presidency. Senior government officials have been hired and fired at the pace of a reality television show. Myriad disclosures have intensified questions about whether Trump’s coterie colluded with Russia to influence the U.S. election. Big parts of his agenda have stalled.
All the while, Trump has unleashed his signature Twitter rants, sometimes undercutting the positions of his cabinet members and sowing confusion. In the estimation of many economists, the dollar’s fall reflects an assumption that his administration will be hard-pressed to deliver on key goals.
“The potential for serious investment and tax reform and economic growth in the United States is unlikely to be realized,” said Ian Goldin, a former World Bank vice president and now professor of globalization and development at the University of Oxford. “There’s just a mood that gets amplified every time we have a disaster in the White House, or a new tweet.”
Currency values are both volatile and relative. The dollar’s worth must be understood as a reflection of contrasting economic prospects in the U.S. and other lands.
Trump’s pro-growth initiatives have been sidelined just as the Federal Reserve has lifted interest rates, constraining American expansion. At the same time, Europe has shown encouraging signs of vigor.
Given these shifts in fortune, investors have been inclined to sell dollar holdings while shifting the proceeds into euros. Since January, the dollar has lost more than 11 percent against the euro.