Trump’s involuntary policy of the strong Dollar

While the trade talks with China evidently went sufficiently constructively and US President Trump has also found (albeit highly dubious) financing for his prestige project, the wall along the Mexican border, the risk is growing that he will now turn his attention to his next arch-enemy. It has long since ceased to be a secret that he is annoyed by the successful German (car) exports to the USA. Possibly with the report from his Trade Department he now has the formal basis for imposing tariffs of up to 25% on automobile imports “for reasons of national security”. For the Euro-US Dollar exchange rate the corresponding discussions pose double-trouble: Firstly, the US Dollar is currently the ultimate safe haven – irrespective of the nature of the uncertainties. Secondly, the Eurozone, which is economically fragile anyway, and with it the Euro, would suffer at the hands of both a collapse in exporting activity and the unspecific investor uncertainty thus caused.

Advocates of free trade have long since voiced the opinion that the US President is not doing himself any favours with his escalation of the spiral of customs tariffs and counter-tariffs. Yet even the US car industry, which he purports to be protecting with his move, has closed ranks in rejecting the idea of customs tariffs. Over and above the globally intermeshed nature of production chains and the fear of retaliatory customs measures there is another far more valid reason why Trump’s plan could backfire: A stronger safe-haven US Dollar would have a negative effect on the international competitiveness of US exports across the whole board of US industry.

Trump was, after all, never a champion of the established “policy of a strong greenback”. He has on various occasions already complained about the unfair treatment of the USA in this regard (“The Dollar’s too strong – it’s killing us.”). Now Trump has finally succeeded in deterring the Fed from continuing its “damaging” policy of interest-rate hikes (or rather that is probably his interpretation of the change in monetary policy), as a consequence of which an important source of the US Dollar’s strength in recent years has evaporated. To this extent, it would from the viewpoint of foreign exchange policy be truly negligent should Trump now give investors a new reason to prefer the US Dollar – no longer for the yields but as the preferred safe haven. Trump’s experiences in the trade policy dispute with China could mislead him as a blueprint for the exchange-rate implications. China was (and still is) willing to resolutely counter undesired exchange-rate responses. Beijing has largely succeeded in damming any Yuan weakness, which was fundamentally pre-programed as a consequence of the trade dispute. Trump should not expect this if he escalates the disputes with the EU. Even if the Dollar presumably emerges from the skirmish victorious, it could spell Trump’s first real defeat.

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