(Bloomberg Opinion) -- President Donald Trump has lately taken to criticizing Europe for taking actions that cause the euro’s value against the dollar to decline. The underlying logic appears to be that a stronger dollar is bad for the U.S., because it undercuts the competitiveness of the country’s exports.
It’s not that simple. Trump’s concerns are largely misplaced.
The proximate irritant for Trump has been the European Central Bank’s effort to bolster the region’s economy, by promising to take further steps to lower interest rates if the outlook worsens. This should push down the value of the euro against the dollar, as investors shift money toward the U.S. currency in expectation of higher returns. All else equal, the exchange-rate change should weigh on U.S. exports of goods and services by making them more expensive abroad.
But all else is not equal. If the ECB’s policies work, they will generate stronger global growth. This, in turn, will boost foreign demand for U.S. exports, likely more than offsetting the negative impact of a stronger dollar. Also, it’s not clear how a weaker currency would benefit the U.S. at this point in the business cycle. With the economy already operating close to capacity, the Federal Reserve would have to counteract any export gain by raising rates to remove monetary stimulus.
Beyond that, in a more general sense, a weaker currency implies less purchasing power for U.S. consumers, as the dollar cost of imports and foreign travel increases. In other words, a weaker dollar makes Americans poorer. That’s hardly consistent with the objective of making America “great again” -- which helps explain why past U.S. administrations have generally favored a strong dollar.
The dollar is strong right now for various reasons. For one, the U.S. economy is doing relatively well, which leads investors to buy dollars so they can put their money into the country. Also, there’s less risk of a recession, in part because the Fed still has more monetary policy ammunition at its disposal than do the central banks of Europe and Japan.
A third contributor to the dollar’s strength is Trump’s own trade policy. His tariffs increase the cost of -- and hence reduce demand for -- a wide range of imports, but they don’t affect the fundamental imbalance in U.S. savings and investment that drives the trade deficit. As a result, the dollar must compensate by rising enough to keep the deficit in line with the imbalance.
So if President Trump wants to identify why the dollar is strong, he should focus on his trade policies. If that’s not appealing, better for him to drop the subject.
To contact the editor responsible for this story: Mark Whitehouse at mwhitehouse1@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.
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