Late last week, I said it’d be ironic if “US exceptionalism” peaked in 2024 and began to wane during the first year of Donald Trump’s promised American renaissance — the “golden age” he previewed in his second inaugural.
But there’s a sense in which Trump actually wants less “US exceptionalism,” although he certainly wouldn’t couch his policy agenda in those terms.
Trump needs and, arguably, wants, a weaker dollar lest America’s trade partners should get a reprieve from his tariffs through the FX channel. China, for example, reportedly intends to let the yuan weaken to ~7.50 to help neutralize the impact of Trump’s trade levies.
The frustrating part for Trump is that his domestic agenda — which entails running an economy that’s already outperforming hot, talking up an already buoyant stock market and handing out tax cuts to people and companies which don’t need them — makes the US and its assets look even more attractive to international investors than those assets look anyway, prompting inflows which in turn bolster the dollar.
At the same time, Trump’s vanity and penchant for vindictive rhetoric very often manifest as loud assertions of US economic supremacy accompanied by derision aimed at the economies of other nations, thereby amplifying investors’ preference for, and thereby flows into, USD assets which, again, bolsters the dollar.
Squaring the circle — i.e., sustaining and boasting about US exceptionalism while capping dollar strength for the purposes of fighting the trade war(s) — requires exhorting the Fed to cut rates and insisting on measures that reduce America’s bilateral deficits such that other nations don’t have so many dollars that need to be recycled into US assets.
This is a really critical dynamic, and as such, I wanted to highlight a bit of color on the subject from Nomura’s Charlie McElligott. The three short passages below are presented without further comment.
Via Charlie McElligott
Trump’s doing the dance on tariffs (exploiting oscillating periods of market calm to inject volatility and vice versa, which will continue into each month’s escalations), but the statement of intent is there: Structurally, he has a desire to rebalance global trade with the US and reverse / reduce the ‘exorbitant privilege’ of the (over-valued) US dollar’s reserve currency status (global hegemon, ‘cleanest dirty shirt’ mak[es] it the preferred destination for other nations’ excess trade balances) for something more ‘floating,’ transactional and FDI-based.
Rationally then, this paradigm shift should hypothetically boost ‘reserve alts’ like the yen as a ‘credible’ global currency alternative (at least locally, to trade this narrative, and especially with BoJ rate normalization and pending hikes), along with, most glaringly, gold (does it ever go down?!) and perhaps Bitcoin, as beneficiaries from even just a marginal rebalancing of RoW reserves and excess trade balances.
And if we were to indeed see Trump’s desired wholesale reduction is the US trade deficit in a future state, it stands to reason that said lower trade deficit would be a negative for USD and USD assets as part of the rebalancing, due to then reduced capital flows into the US.
