President Donald Trump has called on the U.S. Treasury and the Federal Reserve to weaken the U.S. dollar, arguing that American exports are being hurt by other countries’ efforts to devalue their own currencies.
But some are warning that the president’s efforts could negatively impact GDP growth in the short-term, and start a currency war that could backfire in an even stronger dollar.
“Historically, however, attempts to weaken the dollar have met with mixed success and there are good reasons to believe that any intervention now would fail,” Capital Economics wrote in a note July 8.
Over the past few weeks, Trump has accused China and Europe of manipulating their currencies by easing monetary policy and weakening their currencies. On July 3, Trump tweeted that countries abroad have been “playing [a] big currency manipulation game and pumping money into their system in order to compete with [the] USA.”
Trump argues that a stronger dollar is hurting U.S. exports by making them more expensive for buyers abroad — damaging the administration’s efforts to reduce the trade deficit. Boosting exports have been the center of Trump’s game of chicken on tariffs with longtime trade rival China, but also close neighbors Mexico and Canada.
His proposal? Get the Federal Reserve to “match” the actions of the European Central Bank and the People’s Bank of China by lowering interest rates and taking some steam out of the U.S. dollar.
Trump has repeatedly called on the Fed to ease policy.
The idea of manipulating the U.S. dollar is not limited to the White House, or even the GOP. Massachusetts Democrat and 2020 presidential candidate Elizabeth Warren has proposed “actively managing” the U.S. dollar to boost exports and domestic manufacturing.
“We should consider a number of tools and work with other countries harmed by currency misalignment to produce a currency value that’s better for our workers and our industries,” Warren writes in her economic plan.
But there are two concerns: the consequences of intervening in currency valuation, and whether or not the Fed would be willing to help out.
Backfire?
Some worry that manipulating the U.S. dollar would simply push other countries to further devalue their currencies, spurring a currency war that could exacerbate the trade spats between the U.S. and other nations.
“More broadly, Trump's penchant for verbally intervening in the foreign exchange market, and now implicitly threatening intervention may risk weaponizing the currency market,” Bannockburn Global Forex’s Marc Chandler wrote July 7.
Over the past few months, the U.S. dollar has appreciated against major currencies like the Euro, the Chinese yuan, and the British pound. The U.S. dollar index has fluctuated over the last six months, but has risen from 95.90 as of January 8, to 97.31 as of Monday afternoon.
Capital Economics wrote that weakening the dollar would be countered by other countries and could “backfire” if long-term interest rates spiked as the central bank sold assets to stabilize the dollar. In the short-run, they warn that a weaker dollar would increase import prices and reduce the purchasing power of U.S. households and businesses.
“[W]e would view any action to deliberately weaken the dollar as negative for near-term GDP growth,” Capital Economics wrote.
But the question remains about whether the president could spur any action on weakening the U.S. dollar in the first place. The key is whether the Fed would get involved.
Will the Fed play along?
The Federal Reserve has not acknowledged interest in pulling the strings on the U.S. dollar.
