Don’t Bet Your Bottom Dollar

 

President Donald J. Trump wants a strong economy, a strong military and a strong U.S. dollar. Well, maybe not.

When the Populist in Chief met the elite of the elite in Davos, Switzerland this past week, he told the assembled hedgies, private equity titans, pundits and heads of state that “America is open for business.” Had it really been closed for business before January 2017?

But on a key issue, the Trump Administration managed to speak out of both sides of its mouth.

Treasury Secretary Steven Mnuchin, who always seems to have one finger in the air to track the wind’s direction, declared, “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” he said. Obviously, the dollar had its biggest one-day decline in nearly a year on global currency markets.

The word “weaker” is not in the alpha male president’s vocabulary unless he’s criticizing an opponent. “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar,” he said. “Our country is getting so economically strong and strong in other ways, too.” That’s five “strongs” in two sentences, but who’s counting?

So, what happened next and what does it mean?

The dollar bounced a bit before the rally faded. The U.S. dollar index, which tracks the greenback against major global currencies, closed at 89 Friday. That’s down 14% from the 102.95 at which it traded in December 2016, right after President Trump’s election made America great again.

In theory a strengthening economy—at least until the latest disappointing GDP report—a healthy job market, a Federal Reserve that’s gradually tightening monetary policy while Europe and Japan’s central banks still haven’t should be drawing capital to the U.S., and that would cause the dollar to rise, not fall.

But a stronger global economy is raising commodities prices, which are priced in dollars, and Europe’s strengthening recovery has stoked more interest in the once-shunned euro. Investors also are putting their money into markets that are trading at more reasonable valuations than the U.S.

A weaker dollar is good for U.S.-based multinational companies whose export business gets translated back into weaker dollars. That helps earnings per share and their stock prices. It’s also good for U.S. investors who invest in overseas funds, which have had an extra boost in dollar-denominated returns.

But in the long run, a weaker dollar means higher import prices that cut into Americans’ standard of living. It also could lead to higher interest rates to attract foreign capital and even a currency war as other countries devalue to remain competitive.

Over time, currency effects usually turn out to be a wash, and the dollar may right itself.  But investors still want to know whether the U.S. government wants the greenback to be weak or strong.

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