WITH the United States mid-term elections weeks away, a surging dollar is exposing a central contradiction in President Donald Trump’s economic agenda: currency markets are delivering the opposite of what his administration wants.
Trump’s economic record in the first two years of his second term is being heavily scrutinised.
Polls show voters’ approval of his handling of the economy has rarely been lower. That goes a long way toward explaining why betting markets point to his Republican party losing control of the House of Representatives, and perhaps even the Senate, on Nov 3.
Yet if there’s any truth to the market adage that a country’s currency is a reflection of the world’s confidence in its economy, Trump should be going into the upcoming vote brimming with confidence.
The dollar has been rising steadily, recently hitting its strongest level in 18 months against major peers.
But a strong and appreciating exchange rate is the last thing Trump wants.
His administration’s economic and trade policies are aiming to revive US manufacturing, make American exports great again and shrink the trade deficit. A strengthening currency won’t help with any of that.
One might expect the dollar to be under pressure, especially given that the United States trade balance has not narrowed according to the administration’s plan.
Imports have exploded to record levels, largely driven by US companies hoovering up the chips, equipment and goods needed for the artificial intelligence (AI) build-out, and the country’s trade deficit is widening.
It was 2.7% of gross domestic product (GDP) earlier this year – one of the smallest readings of the century – but it could be headed for 4% of GDP next year, according to Dean Maki at hedge fund Point72.
But the dollar is not weakening. It did during Trump’s first year back in the Oval Office, amid concerns about “dollar debasement” and a “sell America” mentality among foreign investors fostered by Trump’s tariffs, but that has since gone into reverse.
Why? Because exchange rates are relative, and the greenback currently appears to be the proverbial “cleanest dirty shirt.”
While the United States is suffering from acute debt and deficit concerns, so are other developed countries, most notably France.
Investors fear that Paris is unwilling to take the politically unpalatable steps to get its budget under control and are thus slamming the euro.
Similarly, worries that higher interest rates will make it nearly impossible for Japan to service its enormous debt load have anchored the yen near its recent historical lows.
In short, the dollar is “winning” as much by default as it is benefiting from the flood of global capital chasing the United States AI dream.
This is not what the White House had in mind.
Trump and Treasury secretary Scott Bessent clearly want a weaker dollar, even if decades of a quasi-official “strong dollar” policy at the White House – dating back to the days of former Treasury secretary Robert Rubin in the 1990s – make it challenging for them to say so outright.
The Trump administration’s views on the US currency were flagged almost exactly two years ago in A User’s Guide to Restructuring the Global Trading System, a paper by Stephen Miran, then a senior strategist at hedge fund Hudson Bay Capital Management (HBC).
Miran went on to serve as chairman of the Council of Economic Advisers under Trump, who later appointed him as a Federal Reserve (Fed) governor for a short spell.
He has since returned to HBC, but his 41-page manual still appears to serve as a broad framework for the administration’s trade, currency and economic policy.
The blueprint has come to be known as the “Mar-a-Lago Accord,” in a nod to the famous 1985 “Plaza Accord,” under which the world’s leading economic powers agreed to devalue the dollar.
Echoing Trump’s decades-long view, Miran wrote that “deep unhappiness with the prevailing economic order is rooted in persistent overvaluation of the dollar (which) makes US exports less competitive, US imports cheaper, and handicaps American manufacturing.”
He has a point. At the time of Trump’s inauguration in January last year, the dollar’s broad, real effective exchange rate was the strongest in over 30 years.
Miran argues that the global trade and financial systems can be rewired to America’s benefit, but the path “is narrow, and will require careful planning, precise execution, and attention to steps to minimise adverse consequences.”
Americans casting their midterm election votes on Nov 3 may not have the patience for this.
While the United States economy continues to grow at a healthy pace and unemployment remains low, households are feeling the adverse economic consequences of Trump’s policies over the past two years.
Tariffs have raised the cost of imported goods, according to a recent New York Fed study, and the United States war with Iran, launched in February, has led to soaring energy costs, most notably record-high diesel prices at the pump.
As a consequence, inflation remains elevated, bond yields are the highest in a quarter of a century, and real wages are now falling.
Given all this, the big question is whether the American public will give the Trump administration the space to try to turn the dollar’s tide. — Reuters
Jamie McGeever is a columnist for Reuters. The views expressed here are the writer’s own.
