Trump and the Dollar

Trump , Dollar, US Administration, FED, Fundamental Analysis, fx trader, forex

Although in office less than a fortnight, the new US Administration is showing a disregard not only for the domestic convention but international agreements like on refugees and its talk about the dollar. Some observers had argued that the conduct of monetary policy was tantamount to currency manipulation, but the G7 and G20 offered a more nuanced understanding.

Manipulation itself was not frowned upon because it violated the sanctity of the markets as some moralists want to argue. Rather manipulating domestic interest rates was accepted. It is not a zero sum game. Currency manipulation to boost exports is a zero sum undertaking and is thought best to avoid.

Over the last couple of weeks, several Administration officials have talked about the dollar. Some of these remarks were in the confirmation hearings and needed to be kept in that context. However, others seem to have gone out of their way to comment. Trump himself warned a few days before the inauguration about too strong of a dollar.  

On Tuesday, the head of Trump's new National Trade Council, Peter Navarro, told the Financial Times that the euro was "grossly undervalued." He warned that euro was like an "implicit German mark" and its low valuation gave German an advantage over its trading partners. Navarro said Germany was one of the main obstacles to a trade deal with the EU. He confirmed what has been suspected: TTIP, the Transatlantic Trade and Investment Partnership negotiations, will not be going forward under Trump.

On balance, many of the comments from Trump officials have expressed concern about the strength of the dollar or, as Navarro, complained about other currencies being undervalued.  The OECD confirms. Its models see the euro at nearly 25% undervalued, sterling almost 16.5% undervalued and the yen 11% under-valued. The Mexican peso, whose marked depreciation has been exacerbated by comments by Trump, is undervalued, according to the OECD, by 147%.

On the other hand, Ted Malloch, who is widely tipped to be the next US ambassador to the EU(and presently a professor at Henley Business School at the University of Reading) is a Eurosceptic. He said he wanted to short the euro and intimated that the eurozone could collapse in the next 18 months.

It is still the early days of the Trump Administration, and it is not clear whose opinion will carry the day. Trump, for example, seemed to support torture to acquire information but deferred to the Secretary of Defense General Mattis. It is not known whether the comments are one-off or part of a sustained campaign.

At the same time, we argue that reason the dollar is strong is not that European, Japanese, and Mexican officials want a weak currency, though some officials clearly do. Rather the dollar's strength is not built on wishes but the incentive structure created by actual policy. In particular, the divergence of monetary policy, broadly understood, has been, arguably, the single biggest force lifting the US dollar.