Trump Shreds Economic Playbook With Strong Dollar, Fed Jabs
(Bloomberg) -- President Donald Trump is showing that no economic-policy tradition is sacred in his pursuit of faster growth and lower trade deficits.
The president on Friday accused China and the euro area of manipulating their currencies, and complained that a rising dollar is blunting America’s “competitive edge.” In a reference to interest-rate increases by the Federal Reserve, Trump added, “tightening now hurts all that we have done. Debt coming due & we are raising rates --- Really?”
Trump’s outburst smashed two pillars of U.S. economy policy over the past quarter century. Presidents have traditionally delegated the nation’s stance on the dollar to the Treasury secretary, who usually hews to the position that a strong dollar is good for the economy. Past presidents have also steered clear of commenting on U.S. monetary policy out of respect for the Fed’s independence so the path of borrowing costs doesn’t move with the whims of politicians.
The question is whether Trump’s remarks mark the beginning of a new era of greater U.S. intervention, one in which the president and members of his cabinet feel free to weigh in on economic issues that were traditionally seen as outside the political domain.
“In today’s world, when currencies are so distorted, it would be foolish not to pay attention to whether the dollar is competitive,” said Dan DiMicco, a former steel-industry executive who advised Trump during the 2016 campaign.
Currency traders may need to keep a closer eye on the president’s Twitter feed. The dollar, which has strengthened more than 5 percent since the middle of April, fell after Trump’s remarks. The Bloomberg Dollar Spot Index slid about 0.8 percent, its biggest intraday decline since March.
“It breaks with the consistency in the dollar messaging that we’ve had over the last 25 years, which has provided a strong backstop for market-determined exchange rates,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank in Toronto. “At the very least, it injects uncertainty into the markets. If we see a consistent drumbeat on this from the president, it probably is going to weigh on the dollar.”
Trump’s dismissal of economic-policy tenets shifts attention during a week when he’s facing growing pressure over his relationship with Russian President Vladimir Putin and his lukewarm support for the finding by U.S. intelligence agencies that Russia meddled in the 2016 election.
In the short term, the president’s jawboning could affect everything from his trade war with China to the Group of 20 consensus on currencies.
Treasury Secretary Steven Mnuchin is heading to Buenos Aires on Friday for two days of talks with his G-20 counterparts, where he will likely face questions about U.S. dollar policy. At their last meeting, G-20 finance chiefs stuck to their commitment to avoid devaluing their currencies for competitive purposes. The Treasury didn’t immediately respond to a request for comment on the president’s remarks on the dollar.
“The secretary will almost certainly hear complaints about these remarks at the G-20, especially in his bilateral discussions,” said Mark Sobel, a former senior Treasury official who left earlier this year, after serving as U.S. executive director at the International Monetary Fund.
The Trump administration’s own fiscal policy may be contributing to the strong dollar and the nation’s growing trade deficit, said Sobel. The IMF projects the U.S. trade deficit will widen as tax cuts and spending increases enacted this year stoke demand for imports.
The view that China and the euro area are manipulating their currencies contradicts the Treasury’s own currency report, which found in April that no major U.S. trade partner is gaming its exchange rate.
Trump has so far focused on using tariffs to force China to change its trade practices. His comments on the yuan indicate the president is willing to drag currencies into the conflict, which shows little sign of abating. The yuan tumbled this week to its lowest value in a year, raising questions about whether Beijing was letting the currency weaken to insulate itself from American trade measures.
But it’s not always easy to discern whether countries are manipulating their currencies, said Joseph Stiglitz, the Nobel Prize-winning Columbia University economist and former adviser to Bill Clinton. Following the financial crisis, the U.S. indirectly used low interest rates to keep the dollar low, he said.
“Lowering interest rates to zero lowered the value of the dollar. And that was the main way in which our economy recovered,” Stiglitz said in phone interview.
Trump’s comments will make life difficult for both the Treasury and the Fed, said Tony Fratto, former White House deputy press secretary under George W. Bush and founder of Hamilton Place Strategies in Washington. “Now any decision that the Fed makes, market participants are going to try to put it in the context of what they know are the president’s and the administration’s desires.”
The Fed has raised interest rates five times since Trump took office in January 2017, with two of those coming this year under Chairman Jerome Powell, the president’s pick to replace Janet Yellen. On Thursday, Trump said he’s “not thrilled” with the rise in borrowing rates.
Trump has been on a mission to reduce the $552-billion U.S. trade deficit and rebuild the nation’s manufacturing sector. His remarks Friday suggest his trade hawkishness may influence other realms of American policy, including its stance on the price of money.
“They literally have the President of the United States trying to jawbone currencies and put pressure on the Fed to keep the currency weak. Why? Very specifically to gain a trade advantage,” Fratto said. “What we accuse trade partners of doing, the president is doing.”
©2018 Bloomberg L.P.