During his 2016 presidential campaign, Donald Trump promised to label China a “currency manipulator” on day one of entering the White House. Trump won the election, but it took his administration another three years before hitting Beijing with the foreign exchange manipulator tag, a broadly symbolic move that had little lasting impact on the value of the Chinese currency.
Turn the clock forward to 2024, Trump is back in the presidential race and threatening to assume the currency manipulator tag himself. In an interview with Bloomberg Businessweek this month, he called the strong dollar “a big currency problem” and “a tremendous burden on our companies. The discrepancy … between the dollar and the [Japanese] yen and the dollar and the [Chinese] yuan is unbelievable. I think we’re in a very bad position.”
Trump’s comments (coupled with his selection of JD Vance as his potential vice-president, a politician who has railed against the strong dollar’s impact on rust-belt manufacturing jobs) have raised the prospect of a significant devaluation attempt by a future Republican administration.
However, permanently devaluing the dollar, the world’s reserve currency, is fraught with problems, from the cost to America’s taxpayers to its inflationary consequences to the inherent co-ordination conundrum at the heart of the policy.
The dollar has been one of the best-performing currencies in the world over the past two years, super-charged by surging economic growth and aggressive monetary tightening by the US Federal Reserve, the country’s central bank. On a trade-weighted measure, the dollar has strengthened by 3 per cent this year and is 10 per cent stronger than the average over the past decade, according to Bank of America.
In contrast, Trump’s remarks came as the yen slumped to a fresh 36-year low against the dollar last week, while China’s yuan is approaching a 13-year low against the greenback as part of a managed exchange rate controlled by China’s central bank.
Strongmen leaders don’t always want strong currencies. Trump’s promise to engineer a weaker currency is a continuation of his first-term rhetoric, when he vowed to protect American manufacturers from perceived unfair foreign competition. The result was a raft of tariffs against trading partners, led by China, policies that have been stepped up still further by the Biden administration.
The surging dollar hurts the competitiveness of America’s exporters selling to the rest of the world. Currency strength wiped off $8.4 billion from corporate profits in the United States in the first quarter of the year, according to Kyriba, a cloud treasury and finance specialist. The profits erosion was 200 per cent higher than in the previous quarter and coincided with a period of sticky US inflation that led traders to reverse their bets on imminent interest rate cuts.
This, in itself, is telling. Long-term moves in free-floating exchange rates mostly are determined by differences in growth trajectories and the interest rate environment across economies. They can’t be easily controlled by governments. Japanese authorities have spent tens of billions of dollars trying to prop up the weakening yen this year, with little to show for it.
A weaker dollar would make American exports more competitive, Republicans argue
BILL PUGLIANO/GETTY IMAGES
Trump’s promise of a weaker dollar also runs counter to his other main policy proposal to impose a 60 per cent tariff on Chinese imports and one of 10 per cent on all the US’s trading partners. Trade protectionism pushes up the value of the dollar by weakening the currency of the country hit with additional trade barriers.
“Trump’s policy programme is incoherent. Many of the things he likes, tariffs and American international withdrawal, would in the first instance be pro-dollar,” Freya Beamish, of TS Lombard, an economics research provider, said. “Tariffs weigh on the currencies of the tariffed country. At the same time, American withdrawal as the global police raises risk-off events that filter through into dollar strength.”
If the Republican presidential candidate wants to make good on his promise, there are tools that a future administration could wield to try to engineer a weaker dollar. The first step would be for authorities in the US to begin buying up vast quantities of foreign exchange to help to soften the dollar. But this would have to happen through the Fed, which is unlikely to yield to Trump’s demands for a massive currency intervention at a time when it is still fighting threats to inflation (a weaker currency risks stoking consumer prices).
Without the Fed at his disposal, Trump could order the US Treasury to issue debt to buy up large amounts of foreign assets to accelerate the devaluation process. While this is more plausible than a central bank intervention, the quantities involved are likely to dwarf even Trump’s political will to make the devaluation a reality.
George Saravelos, at Deutsche Bank, believes that the US Treasury would have to spend multiple trillions of dollars and would need to stump up billions in interest rate penalties from any such intervention. “The optics of a Trump presidency buying foreign assets and losing taxpayer money in the process would not be politically palatable,” he said. “The market is far too big even for the US federal government to take on.”
If a unilateral devaluation is out of his reach, Trump could opt for the multilateral approach by getting America’s trade partners to help him. This raises the prospect of a 21st century “Plaza Accord”, repeating the 1985 deal under which finance ministers from Britain, Germany, France and Japan agreed to a managed depreciation of the dollar to help out their economies and a battered US manufacturing sector.
Trump, who has yet to show much skill for co-ordinated diplomatic action to achieve his policy goals, would be an unlikely president to engineer a new Plaza Accord. Even if he could pull off such a deal, according to Saravelos America’s trade partners simply do not have the reserves to buy huge amounts of their currency and most central banks would “run out of reserves within roughly ten days”.
With these costly options out of reach, a Trump administration would be likely to repeat the pattern of his first term and to keep the threat of tariffs dangling over America’s trading partners in an effort to coerce them into a de facto dollar devaluation. A consistent talking-down of the currency, through threats and outlandish social media posts, may deliver some light relief, but it’s unlikely to be enough. To close the US trade deficit entirely, a devaluation in the region of 40 per cent would be needed, Saravelos said.
As for the economy, a dollar depreciation and the likely extension of federal tax cuts by the Republicans would be inflationary and could put the brakes on the Fed’s future monetary easing plans. This would force the dollar up, not down. As Beamish warned: “The risk is that in implementing his dollar policies, Trump reminds himself of what he does not like: an overvalued currency.”
