Why Donald Trump’s about-turn on the US dollar is right on the money

After months of bemoaning the strength of the greenback, the US president has good reason for now declaring his support for a strong dollar – he’s trying to shore up confidence in US paper as the Treasury goes on a borrowing spree

Neal Kimberley

Published: 5:00am, 20 May 2020

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“It’s a great time to have a strong [US] dollar,” President Donald Trump told Fox Business News last week. Yet, last August, Trump was tweeting that he was not thrilled with the “very strong dollar”. The US president has done an about-turn, but it makes sense.

Trump has adapted to circumstances and is right on the money. Trump, the self-proclaimed “King of Debt”, understands that what the United States needed from its currency in a pre-coronavirus environment is not the same as what it needs in the middle of a pandemic.

In pre-pandemic 2019, the White House identified the best interests of the US – and by extension Trump’s re-election prospects – with US exporters doing well. Their success would result in the creation of yet more employment for an economy that was already seeing substantial and sustained job creation.

As US president, “one would think that I would be thrilled with our very strong dollar. I am not!” Trump tweeted on August 8 last year, criticising tighter Federal Reserve monetary policy and complaining that US dollar strength was “making it more difficult for our great manufacturers like Caterpillar, Boeing, John Deere, our car companies, and others, to compete”.

Containers are stacked at the Port of Los Angeles on March 26. In a pre-coronavirus world, a weaker US dollar would give US exporters a competitive advantage. But the pandemic has depressed the appetite for spending, and a weak domestic currency is now of limited utility. Photo: AFP

That was pre-Covid-19, a world before economic lockdowns, where consumers were spending and businesses investing. In that world, a more competitive currency could have helped US exporters gain some degree of competitive advantage in pursuing trade opportunities.

But that was then. Amid a pandemic, economic activity has slumped. Millions have lost their jobs. Around the world, governments and central banks are resorting to fiscal and monetary policy tools in an effort to stabilise the economic situation, even as the medical profession grapples with the health emergency and the global pharmaceutical industry searches for a vaccine.

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In this situation, the competitive advantage that a weaker domestic currency offers to exporters of any nation is of limited utility. If no one’s buying at any price, then securing a price advantage through a weaker currency is irrelevant. Only a return to some degree of economic normalcy will change that equation, and the world is a long way from achieving that.

In China, the first nation to suffer the depredations of Covid-19 and the first to gain a measure of control over its spread, retail sales fell again in April. Admittedly, the year-on-year decline was only 7.5 per cent, much improved from March’s 15.8 per cent drop, but that was worse than the 6 per cent fall analysts had expected.

It may take a while for discretionary spending in China to rebound. The negative impact of Covid-19 on Chinese households, and indeed across the world, may mean that, individually, those same households will seek to rebuild their domestic finances in the short term and curb expenditure.

A single household doing that has no impact on the economy. But if societal retrenchment reduces aggregate demand, that will have a negative impact on production, as manufacturers scale down their activities. Ultimately, that just makes the economic situation even worse, a concept known as the “paradox of thrift”. Restoring consumer confidence anywhere just won’t happen overnight.

In the meantime, governments globally, with a few notable exceptions such as Sweden, have initiated hard economic lockdowns to try to slow the transmission of Covid-19. For their part, central banks have been cutting interest rates and restarting quantitative easing to ensure financial systems are awash with cheap liquidity.

Economic lockdowns adversely affect tax collection but governments need to be fiscally expansive. Indeed, policymakers have adopted the classic Keynesian response of munificent fiscal stimulus. But munificence has to be financed and currently that means reliance on increased public borrowing. Indeed, the US Treasury is set to borrow a record-breaking US$2.99 trillion in the second quarter of 2020.

In the past, Beijing has been a huge buyer of US debt, but relations are strained and the Chinese economy has its own share of coronavirus-related economic problems. Washington can’t just assume China will again step up to the plate.

Nevertheless, Washington needs overseas accounts to pick up some of that issuance, and so needs to create an attractive environment in which that can occur. Potential foreign buyers will be happier buying US paper if they feel comfortable that the US dollar is going to stay strong, a fact grasped by the King of Debt.

Trump, a lifelong salesman, is now trying to help sell US debt. That’s why he really thinks that now is “a great time” to have a strong greenback.

Neal Kimberley is a commentator on macroeconomics and financial markets

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