Donald Trump never likes to admit defeat, but in attempting to talk down the dollar he is following the adage: “if you can’t beat ‘em, join ‘em”.
After his inauguration, the US president brandished Germany, Japan and China as currency manipulators, accusing them of deliberately keeping their currencies weak to gain a competitive edge for exports. However, this week he declared that “our dollar is getting too strong.”
Strategists were not slow to spot the glaring contradiction. “If a leader of another country said what he did, they would likely be accused of manipulating their currency,” was the reaction of Marc Chandler, a foreign-exchange strategist in New York at Brown Brothers Harriman.
By delivering a volley about the dollar, Mr Trump has broken with practice by encroaching on the territory of the US Treasury secretary, the official who typically delivers a US administration’s view on the currency. Given his unconventional presidency, that is unlikely to come as a surprise.
More strikingly, in complaining about the strength of the currency, the president has torn up the so-called strong dollar mantra adopted by US administrations since Robert Rubin was Bill Clinton’s Treasury secretary in the 1990s. Mr Trump this week claimed the best thing about a strong dollar was that “it sounds good”.
The bigger question for the $5tn foreign-exchange market is the simple one: will the president’s attempt to talk the dollar down work?
This week’s episode suggests that over a short-term horizon the answer is yes. The dollar fell about 0.4 per cent against the euro and relinquished an advance against the yen after Mr Trump’s comments were published on Wednesday, before finding support on Thursday. John Normand, a forex strategist at JPMorgan Chase, says it is in the market’s daily swings where the effect of such comments will reberverate .
“Statements about whether the US favours a strong or weak dollar are sources of intra-day volatility rather than a trend unless one of the reinforcing monetary, fiscal or trade dynamics is in motion,” Mr Normand explains.
Alan Ruskin, a currency strategist in New York at Deutsche Bank, points out that any verbal efforts by Mr Trump or any other leaders to dent their own currencies only gain real traction if they are “pushing on an open door.” In other words, if economic fundamentals point to a weaker dollar anyway.
While the dollar index – a broad measure of the currency – has fallen 1.7 per cent this year, few are confidently writing the obituary for the dollar rally.
“The Fed isn’t done tightening yet, the economy isn’t done growing and we don’t think we’ve seen the highs for yields yet. At this point, market expectations of a third Fed hike this year has faded significantly, and by too much,” notes Kit Juckes, a strategist at Societe Generale.
Any Trump commentary on the dollar may have a only a limited ability to disrupt underlying trends, but the president’s actions can shape them significantly, strategists say.
His trade policy, a proposed border adjustment tax that would make imports more expensive, any fiscal stimulus, as well as his appointments to the Federal Reserve all have the capacity to influence the dollar, says Mr Normand.
Indeed, the bond market seized on Mr Trump’s remark this week that he had not ruled out handing Janet Yellen a second term as chair of the Fed. Ms Yellen is seen as a central bank chair inclined to raise rates in a measured way, something which could be a drag on the dollar.
“It was notable that President Trump also expressed more support for Fed chair Yellen and current low interest rate policy,” says Lee Hardman, a currency strategist at Japanese bank MUFG.
If Mr Trump really wants to find a way of achieving and maintaining a weak dollar, Mr Nomand adds, the president could do worse than staff the Fed’s rate settting committee with officials who will keep rates low and the Fed’s balance sheet large.
Although Mr Trump has not been shy in attacking the currency policies of rivals, the brightening global economy may end up helping him keep dollar strength at bay.
“For all that though, further dollar strength is going to be muted because by and large, economic prospects elsewhere are improving too,” argues Mr Juckes.