US President seems convinced today’s strong dollar is holding back American industry.
In his view the US needs a weaker dollar to push exports, bring back manufacturing jobs and help reduce the country’s . But others are not convinced by the simplicity of the argument.
David Lubin explains that a strong dollar means it is relatively cheap to buy other currencies, while a weak dollar means it’s more expensive to buy other . The senior research fellow at the London-based think tank Chatham House told DW that it’s “all about exchange rates.”
“When the dollar is strong, US imports rise because foreign goods become cheap relative to domestically produced goods,” said Lubin. At the same time, US exports fall as they become more expensive, he added.
How much power does the US president have?
Yet, getting the dollar exchange rate under control is wildly complicated and mostly out of the hands of any president.
The dollar’s value is determined by a huge global foreign-exchange market, and not the president or the US government, says Lubin.
Anthony Abrahamian, an investment strategist at US investment bank Rothschild & Co Wealth Management, argues that part of the reason why the dollar has been strong over the past decade or so was America’s “stronger economic growth rates” compared with other industrialized countries.
At the same time, the US trade deficit seems to mostly be a “function of relative demand,” Abrahamian told DW.
“The US consumer is the world’s number one customer — spending more freely than elsewhere else — and so ,” he said.
How much power does the US government have?
Still, the US government does have a number of levers available to steer the dollar and the wider economy.
Most straightforward, the can cut interest rates. The president officially has little say here, but in the past Trump has not been shy about bullying the head of the central bank.
Additionally, the Treasury could try to buy foreign currencies through its Exchange Stabilization Fund. But, according to Abrahamian, it would have to “purchase huge quantities given the sheer size of today’s currency markets where daily global turnover is reportedly in the trillions of dollars.”
With more dollars on the market they should go down in value.
Lubin argues that Trump could also weaken the dollar by making the country “less attractive as an investment destination.” However, this is a “dangerous doubled edge sword and highly unpredictable,” although it has likely already happened in recent weeks.
“Trump’s frequent U-turns on tariffs, for example, give the impression that the policy environment in the US has become more unstable, and so that makes the US somewhat less attractive as a destination for investment,” Lubin said.
An economic slowdown in the US could further push down the value of the greenback.
A toolbox full of financial tools
Another option is for the US to convince — or force — other countries to sell their dollars for other currencies.
Such a devaluation may sound like reaching for the stars, but there is a precedent called the “Plaza Accord,” named after the hotel in New York City where it was signed in 1985.
This one-off agreement brought together the US, the UK, Japan, West Germany and France — at the time they were the five biggest economies in the world — with Germany and Japan dependent on the US military for defense.
At America’s insistence, these G5 countries agreed to sell dollars in a cooperative and deliberate way thus weakening the dollar relative to other major currencies.
A similar plan to weaken the US dollar has come up again known as the “Mar-a-Lago Accord.” The idea surfaced in November and is being pushed by Stephen Miran, the chairman of Trump’s Council of Economic Advisers.
His new version is aggressive in tone and would punish non-players with taxes, or take away the protection of the US’s defense umbrella.
Abrahamian sees big differences between 1985 and today. The Plaza Accord was more voluntary for one and talk of such an accord today is “likely to be met with resistance from policymakers and finance ministers alike.”
And Lubin added that a Mar-a-Lago type of accord is also “very unlikely,” since the main country on the other side of the table would be China. “I think China would be very ,” he noted.
What could a weak dollar mean for the US?
All this uncertainty around the dollar leaves big questions and any attempted manipulation is libel to lead to unintentional consequences.
A weaker US dollar can have many knock-on effects like boosting commodity prices since they are mostly traded in dollars on international markets. Lubin believes for US households the main risks are , rising prices and rising unemployment.
And Abrahamian says that even if Trump manages to devalue the dollar, it may not actually boost American competitiveness, since prices are “not just driven by exchange rates, but by things like production costs, productivity and quality.”
In the end though, it is unclear if the president will actively try to devalue the dollar. “We should not always ,” concluded Abrahamian.
Edited by: Uwe Hessler
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