(Bloomberg) -- The sustainability of the dollar’s surge in the wake of Donald Trump’s election victory pivots on which of his campaign promises he pursues once back in the White House.
On one hand, he ran for another term decrying exchange-rate appreciation and worrying about its impact on American manufacturing. On the other, he’s vowed to maintain the greenback’s dominant global role and favors policies economists and strategists see as boosting its value.
Invoking language he sometimes used in his first term, Trump told Bloomberg Businessweek in June that “we have a big currency problem” and that the greenback’s strength is a “tremendous burden” on American businesses. JD Vance, the incoming vice president, has also advocated for the benefits of a devalued dollar.
Wednesday’s moves only worsen that “problem,” with the Bloomberg Dollar Spot Index heading for its biggest daily jump since 2020. The logic behind the move: Trump’s advocacy of higher tariffs, lower taxes, immigration curbs and looser regulation will deliver an inflationary policy mix that’s likely to lead to higher interest rates, encouraging flows into the greenback.
“If the Trump policy platform goes ahead, there is still much more to go in the dollar,” said George Saravelos, global head of foreign-exchange research at Deutsche Bank AG.
Citigroup Inc.’s macro asset-allocation team recommended going long on the dollar versus Chinese yuan and the euro on the likelihood of China and the euro region becoming US tariff targets.
But, over time, efforts to actively talk down the dollar could encourage the rest of the world to question the greenback’s role. Even before Tuesday’s results, almost two-thirds of investment professionals around the world surveyed by the CFA Institute expected the dollar to lose its status as reserve currency to some degree in the next five to 15 years.
Trump has highlighted the dollar’s dominance as something he wants to maintain, repeatedly talking this year about the threat to the US if countries start abandoning it in cross-border trade and finance. In the latter weeks of the campaign, he floated a 100% tariff on any nation that would try to find a work-around using the dollar — with most of his grievances targeted at China.
Maintaining the dollar’s role appeared as one of 20 promises in a Republican Party platform released in July. That’s against the backdrop of the BRICS club of nations, anchored by Brazil, Russia, India, China and South Africa, working to develop an independent cross-border payments system.
“We will keep the US dollar as the world’s reserve currency — and it is currently under major siege,” Trump said in recent weeks. “You’re not going to leave the dollar with me.”
By contrast, Vance last year challenged Federal Reserve Chair Jerome Powell to explain how ordinary Americans benefit from having the world’s reserve currency. Vance in April also told Politico that “‘devaluing’ of course is a scary word, but what it really means is American exports become cheaper.”
When in office, Trump called out dollar appreciation for being harmful to US manufacturers but he stopped short of the most extreme measures, such as market intervention. But Scott Bessent, a hedge fund manager who advised the Trump campaign on economic issues, indicated Tuesday he wasn’t anticipating any overt depreciation strategy.
‘Over-weak’ Policy
“In terms of an over-weak dollar policy, I wouldn’t expect that at all,” said Bessent, who has been viewed as a candidate for a job in a Trump administration. “Tariffs cause a stronger dollar so a weaker dollar with tariffs – it’s an economic abnormality,” he said, agreeing with the analysis of most economists.
Bessent also said that if, through Trump-proposed deregulation and an expansion of domestic energy supply, inflation gets down to or below the Federal Reserve’s 2% target “then interest rates could come down, and you would have a market-based dollar depreciation.”
Other options, Barclays Plc strategists said in a September report, would be to attempt a fiscal consolidation — something Trump allies have called for via spending cuts — eroding the Fed’s independence or market intervention, either alone or with fellow governments. The Barclays team concluded that the fiscal approach or an accord with other nations would be hard to coordinate, while eroding the Fed’s standing and acting in markets alone would be too costly.
“Despite Team Trump’s calls for ‘devaluing’ the dollar, the path for doing so is filled with obstacles,” said Mark Sobel, a retired 40-year veteran of currency policy who worked at the US Treasury. The dollar’s role is set given there’s “no near-term alternative, but proposals for dollar devaluation and a 100% tariff on those who shun the dollar fly in the face of the promise.”
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