PRESIDENT DONALD Trump’s bullying of America’s allies and neighbours may appeal to the maga base. Unfortunately, investors feel otherwise. Confidence in the prospects for the American economy has been sapped and financial markets are sinking. The S&P 500 index of American stocks has dropped by 9% since its peak in February. Because Mr Trump’s on-again, off-again protectionism defies logic, their faith in his administration’s ability to steer the economy is evaporating.
It is the same with the dollar. As Mr Trump has threatened tariff after tariff, it has fallen, dropping by nearly 6% against a basket of other currencies since mid-January. Most notable is its decline against the euro, spurred by expectations of a surge in European defence spending.
One source of confusion is that Mr Trump’s team say they want different things. Scott Bessent, the treasury secretary, maintains that the administration wants a strong dollar, in line with recent American policy. Both Mr Trump and J.D. Vance, the vice-president, believe that the strength of the greenback is holding back American industry. Currency traders whisper about a “Mar-a-Lago” Accord, a repeat of the Plaza Accord that in the 1980s prodded America’s main trading partners to co-operate to weaken the strong dollar, and which was first proposed by Stephen Miran, now an adviser to Mr Trump.
Another source of confusion is that, just as with Mr Trump’s tariff policy, the administration misunderstands the benefits and costs of having a weak currency. Proponents of a weak dollar say that it would help make exports more competitive. But the growth of global value chains in manufacturing over recent decades has blunted the impact of exchange rates on sales of goods abroad, because exporters today incorporate more imported material than they once did. In addition, the costs of currency weakness are widely felt. If the 13m Americans in manufacturing jobs benefit, that must be set against over 300m consumers who will pay for the rising cost of imports. Already households’ inflation expectations are rising, even though consumer-price inflation data, published on March 12th, came in a little below market forecasts.
The final—and most corrosive—source of confusion is the baffling logic behind the administration’s policies. By themselves, tariffs should boost the value of the greenback, as Americans buy fewer imports and therefore less foreign currency. Although the dollar may have fallen particularly sharply against the euro because of European spending, its weakness against other major currencies points to an act of grave self-harm: that the hit to the American economy from tariffs is more than outweighing their direct impact.
Consider the wildest suggestion of the weak-dollar enthusiasts, floated by Mr Miran. This is to tax foreign governments that hold Treasury bonds, in order to deter them from owning dollars. That makes no sense. It may not even achieve its purpose of weakening the greenback, because academic research is unclear whether reserve-currency status has consistently boosted the dollar’s value. Even if it did work, it should worry anyone who cares about America’s ability to project its power across the world. Financial sanctions against Russia, and those about to be deployed against Iran, would be less effective if the dollar made up a smaller portion of overseas trade and finance.
For decades investors were drawn by America’s exceptionalism: its strong growth and a government that was a wise steward of the economy. Now they are waking up to impulsiveness and incoherence. American assets will suffer.
