Erratic policy

It’s the dollar not equities that offers the best gauge of President Donald Trump’s performance. It has dropped nearly 10% against major currencies since he took office. That’s not a vote of confidence.

The greenback has fallen by 14% against the euro since January 2017, and erased almost half the gains notched up against major currencies in Barack Obama’s second term. Trump himself tends to tout a rising stock market as validation of his leadership – but in dollar terms, funds tracking stock markets including France, Singapore and China have all outperformed the US on his watch.

By some yardsticks, the greenback should be strengthening. The Federal Reserve has tightened monetary policy, raising US interest rates relative to those in Europe. The President’s tax cuts, signed into law in December, were designed to make the United States more attractive for investment and draw back $2 trillion in corporate wealth stashed overseas.

The foreign-exchange market is signalling instead that international investors want greater exposure to Europe and emerging markets, which are at an earlier stage in their economic recoveries. American tax and spending policies may push the national deficit past $1 trillion in the fiscal year starting October 1, so it may take higher rates and an even cheaper dollar to lure overseas buyers for Treasury securities. Moreover, Trump’s antagonism of key allies, most recently with steel and aluminium tariffs, sows doubt about US leadership.

The irony is that a weak dollar could serve Trump’s trade purposes more effectively than tariffs. Two years ago when the greenback was climbing, the Federal Reserve estimated that a 10% appreciation would cut exports and boost imports, depressing economic growth by 1.3 percentage points after two years. Recent GDP data and January trade figures released last Wednesday have largely borne out that estimate.

The dollar’s 10% depreciation under Trump should have an opposite effect, reducing the trade deficit and boosting growth and inflation. But investors need to maintain confidence in the US economy, or a currency adjustment could turn into a destabilising slide.

That’s where erratic policy, and uncertainty over where the President will now get his economic counsel following the resignation last week of the White House’s top economic adviser Gary Cohn, pose the greatest risk.

Alan McQuaid (12/3/18)