A word on the dollar. I suppose I should say another word on the dollar. I already spent a few minutes editorializing around the greenback’s steep post-election rally in “MAGA High,” but it bears further mention.
As noted, the rationale for dollar strength is that Trump’s going to run-it-hot, so to speak, piling expansionary fiscal policy (from the supply-side, naturally) atop already robust growth, a conjuncture that’s conducive to higher yields, a shallower Fed cutting cycle and, in all likelihood, wider rate differentials than would’ve prevailed otherwise.
All of that points to dollar strength, and so, obviously, does the return of “Tariff Man,” one of Trump’s comic book alter egos. (If you’re interested in the others, check out his NFTs. You’ll find spaceman Trump, NASCAR Trump, sheriff Trump, pheasant hunter Trump and all sorts of other terribly ridiculous variants.)
Whether dollar strength can peaceably coexist with a risk rally is debatable. Too much dollar strength’s a buzz kill for everyone eventually, to say nothing of the term premium rebuild which could conceivably gather steam in the event the bond market gets nervous with the prospect of “the king of debt” running America like one of the half dozen businesses he’s bankrupted in his career.
On Wednesday, SocGen’s Kit Juckes highlighted the policy conjuncture at the heart of this discussion and noted that dollar strength isn’t something Trump will happily countenance for long. Many of you will recall that Trump repeatedly intervened verbally in the FX market last term, and you can absolutely expect him to do so again in his second coming.
“President Trump would like a weaker dollar, but he isn’t going to get his way if he wants to run accommodative fiscal policy at a time when real GDP growth has averaged 3% for the last five years,” Juckes said. “Throw in tariffs at a time when the unemployment rate is only at 4.1% and he won’t get a weaker dollar any more than Ronald Reagan was able to in the first half of the 1980s.”
As the chart header indicates, Juckes doubts the greenback will break out of the range, but at the same time, he sees it staying consistently strong, unless and until Trump admits his own policies are to “blame.”
Trump ran into this repeatedly last term, and by appearances, he’ll have to grapple with it this time around too. If he insists on running the economy hot, then the Fed won’t be able to cut as much as they’d otherwise like to, particularly in the context of an inflation war that still isn’t entirely won. What do you get when you pair expansive fiscal policy with relatively tight monetary policy? Currency strength.
“The dollar is stronger than the next President would like it to be for the same reasons the dollar was in 1984 — US fiscal policy has been more accommodative and interest rates higher than elsewhere,” Juckes went on. “If history tells me anything, it’s that [the dollar] can rise further, but will eventually start falling of it own accord before the President concedes that US policies are largely responsible for the strong currency and its impact on manufacturing/exporting jobs.”
It should be noted: Trump isn’t averse to FX wars. In fact, he loves them. I wouldn’t want to be Jerome Powell right now.
Nice comparison w/ early 1980s and overview of factors affecting likelihood of strength vs. weakness. Important ‘player’ in the complex market pic not probably not getting enough attention. Thanks.
How tempting is it, for a spendthrift government to take control of the printing press? Tempting enough to change the Federal Reserve Act and risk a market shock?
Worth noting that there are a handful of old school GOP Senators who’d probably rather die than get into that kind of thing. You don’t want to set up a situation where — you know — President AOC gets to dictate monetary policy 20 years from now.