Just days before taking office, President-elect Donald Trump roiled international currency markets, telling The Wall Street Journal that the US dollar is “too strong” compared to other global currencies, particularly the Chinese yuan.
“Our companies can’t compete with them now because our currency is too strong,” Trump said. “And it’s killing us.” His comments were followed by a 1.3 percent drop in the value of the dollar against a basket of global currencies in trading on Tuesday, to its lowest level in more than a month.
Trump’s willingness to talk down the value of the dollar is a notable departure from decades of “strong dollar” rhetoric from administrations of both Republican and Democratic presidents going back to the mid-1990s. With few exceptions (notably, former Treasury Secretary Paul O’Neil, who not coincidentally came from a manufacturing background) U.S. officials have consistently said that the preference among US policymakers is for a strong dollar.
But the trade-offs inherent in a strong-dollar policy aren’t always obvious, and more importantly, the ability of the president to materially affect the value of the dollar without taking active steps to manipulate the currency are unclear. Some key questions:
What’s the benefit of a strong dollar?
A strong dollar has a number of positive impacts on the economy, the most obvious of which is that it makes imported goods more affordable for American consumers. It also makes investing in the U.S. more attractive to foreign companies and investment funds. If the assumption is that the dollar will continue to appreciate against foreign currencies -- or at least can be expected not to lose value relative to them -- it is naturally a more attractive currency to hold.
The strong dollar also keeps the Treasury Department’s borrowing costs low, meaning that when the US borrows more money or rolls over existing debt, less federal spending is dedicated to interest payments than would be under a weak dollar scenario. Those lower interest rates extend to consumers as well, who benefit from cheaper mortgages and other loans.
What’s the harm of a strong dollar?
The trouble with a strong dollar gets to the heart of Trump’s promise to pump up the volume of American exports: it makes goods and services produced in the U.S. more expensive relative to those produced in other countries. Every time the euro, yen, yuan, or ruble gains against the dollar, relative prices of U.S. exports go down, making them more competitive globally.
On its face, this is good for the United States in that, theoretically, at least, it leads to more jobs in the manufacturing sector and in service sectors that sell to foreign clients.
What have US policymakers done in the past to keep the dollar strong?
The short answer: Not much. The strong dollar policy has largely been a rhetorical stance for decades, with little direct action to back it up. The US dollar floats freely in the currency markets, and as a rule, the federal government doesn’t act directly to influence its value vis-a-vis other global currencies. (In fact, on the campaign trail, Trump frequently railed against China for being a “currency manipulator” -- that is, for taking active measures to keep the yuan, and therefore Chinese exports, cheap.)
There was a brief episode in 2011 when central banks from various countries acted in concert to stabilize currency markets in the wake of a disastrous earthquake in Japan, but in recent years that sort of thing has been the exception rather than the rule.
In fact, some would argue that US monetary policy, as implemented by the Federal Reserve, has revealed a de facto weak dollar preference by keeping interest rates at rock bottom in an effort to spur some degree of inflation. The strength of the dollar has persisted in spite of the Fed’s extremely accommodative stance on monetary policy for various reasons, including the global perception of the US economy as a safe haven in times of global uncertainty.
What can Trump do to weaken the dollar?
As an example, Trump’s Treasury Department could try to weaken the dollar by buying up other currencies to drive up their prices relative to the greenback. However, the US is party to international agreements against unilateral currency manipulation.
Further, it’s unclear any such policy would be effective in a market as massive as the one that exists for the US dollar internationally. Some $5 trillion in dollar trades take place every single day in foreign exchange markets, the vast majority well beyond the control of the federal government, meaning that it could be difficult for unilateral action by the Treasury Department to move the needle.
One avenue open to Trump is to follow through on his threat to impose protectionist trade restrictions meant to boost US exports at the cost of foreign manufacturers. However, that’s dangerous territory, not only because it invites instability in the markets, but also because it could spark retaliatory action from trading partners that could easily spiral out of anyone’s control.