To be sure, the Trump administration has been angling for a weaker dollar for some time. And that’s all kinds of ironic because it was less than a year ago when Trump famously told the Wall Street Journal that the strength of the dollar was a reflection of the world’s confidence in his leadership abilities.
Of course if you go back and read the actual quote, it betrays Trump’s cluelessness. Just read this from the interview published April 12, 2017 and try to imagine hearing it out loud, from the President of the United States:
I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting—that will hurt ultimately. Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good.
Pardon me, but “usually speaking,” that’s fucking retarded. Only two things are clear there: 1) Trump had some vague conception that a weaker dollar might help him fulfill his campaign promises regarding trade, and 2) Trump doesn’t talk so good.
It was all downhill for the greenback from there as everyone’s “no brainer” trade for 2017 (long USD) went horribly awry thanks to a combination of factors including, but certainly not limited to, the policy divergence theme morphing into a policy convergence theme, Treasury yields defying expectations (that other “no-brainer” trade for 2017 -short USTs – didn’t work out so well either), and the market just generally losing confidence in Trump’s pro-growth agenda.
Fast forward to January and between Steve Mnuchin’s “weak dollar” rhetoric in Davos, ongoing speculation about the ECB getting set to unwind QE, and Trump’s washing machine/solar panel tariffs, the dollar sank to a more than three-year low. Then came the spending deal, jitters about reserve diversification, and questions about the sustainability of the U.S. fiscal path, all of which conspired to ensure that the greenback defied higher yields and remained under pressure.
Then came the steel and aluminum tariffs and the accompanying fears of a looming trade war. This, by most accounts, portends more dollar weakness. “The USD’s tendency to weaken broadly on news of new tariff measures implicitly reflects a view that a preference for increased trade protection goes hand in hand with a preference for a weaker USD,” BNP wrote last week. “President Trump preannounced the imposition of steel tariffs on aluminum and steel [and in] our view is that this is a ‘soft dollar’ policy by proxy,” Deutsche Bank chimed in.
Well now, Goldman is out with their take and it’s the same story. In a note dated Wednesday, the bank writes that in isolation, “an increase in import tariffs should result in currency appreciation, especially at full employment.” But, in the “real world” it might not work out that way.
“First, other countries may retaliate with their own tariffs on US exports [and] these would work in the opposite direction to US import tariffs: weakening US net exports and output, and thereby lowering interest rates and causing the Dollar to depreciate,” Goldman explains, adding that “tariffs may [also] reduce the perceived attractiveness of US assets for foreign investors—because of perceived policy instability and/or as an alternative form of retaliation.”
Next, Goldman offers a brief history lesson. To wit:
The move toward tariffs could be interpreted as a sign the Administration remains focused on trade competitiveness, and that at least some officials might welcome further Dollar depreciation. This was often the context in which trade restrictions occurred in the past. For example, in August 1971 the Nixon Administration imposed across-the-board tariffs of 10% in an effort to force other countries (particularly Japan) to revalue their currencies within the quasi-fixed Bretton Woods exchange rate system. This ultimately occurred, with USD/JPY falling from 357 at the time the tariffs were imposed to 340 by the end of August and about 300 by the end of the year. The tariffs were eventually lifted in December 1971 after the Smithsonian Agreement, which officially reset G10 exchange rates higher versus the Dollar. Similarly, during the second half of the Reagan Administration, the US raised tariffs on a variety of products, again with the intention of improving export competitiveness. Tariffs eventually started coming down at the end of the 1980s after sustained depreciation of the Dollar following the Plaza Accord. Lastly, the Dollar steadily depreciated during the period of narrower steel tariffs during the George W Bush Administration (Exhibit 2)
The bottom line is that Goldman sees “parallels” between those historical examples and what’s going on currently and thus, they “see the latest news as an additional reason to remain cautious on the outlook for the broad Dollar.”
All of that comes with the usual caveats re: it all depending on retaliatory measures emanating from trade partners, the willingness of the Trump administration to push the envelope beyond the limited scope of the steel and aluminum tariffs, and central banks’ response to any price pressures that might materialize.
At the end of the day, Trump will have the satisfaction of saying the same thing about a weaker dollar that he said last April about a stronger dollar.
That is, when asked about the flagging greenback, he can say “partially that’s my fault.”
“Usually speaking,” of course.