Trump Now Says Strong Dollar Is Good Yet Markets Beg to Differ
Trump Now Says Strong Dollar Is Good Yet Markets Beg to Differ
(Bloomberg) -- Just weeks after a surging dollar was causing havoc in world financial markets, President Donald Trump has decided that a muscular U.S. currency is a good thing after all.
“The dollar is very strong,” he told a press conference on Friday. “And dollars -- strong dollars are overall very good.”
The comment marked a U-turn from the president’s rhetoric for much of the past few years, in which he repeatedly called for a weaker dollar to aid U.S. manufacturing companies and boost American exports. It also comes at a time when many economists say that the resurgent U.S. currency is the last thing a global economy -- knocked low by the coronavirus shock -- needs.
“Over appreciation now is in nobody’s interests,” said Adam Posen, a former Bank of England policy maker who’s now president of the Peterson Institute for International Economics in Washington.
Safe Haven
Investors seem to agree. The rapid run-up in the greenback last month was not only a symptom of a worldwide dash for cash by investors seeking shelter from the financial fallout of the Covid-19 pandemic; it was also viewed as posing dangers of its own.
That’s especially so for emerging markets and developing countries that loaded up on dollar-denominated debt in recent years. Those countries faced a double whammy: collapsing demand for their exports due to the shutdown of huge swathes of the world economy, and rising costs to service their dollar debts as the greenback increased in value against their local currencies.
“A very sharp appreciation can be a disaster for countries that have a lot of dollar-denominated debt,” said Maury Obstfeld, a former International Monetary Fund chief economist who’s now a professor at the University of California at Berkeley.
Total dollar credit extended to borrowers, excluding banks, climbed to $12.1 trillion by September, Bank for International Settlements data show. That’s more than double the level of a decade before. It amounted to almost 14% of global gross domestic product; the ratio back in 2009, during the financial crisis, was under 10%.
The U.S. currency has slipped back from its March peak, in part due to the efforts of the Federal Reserve to pump liquidity into the U.S. and global economies.
The U.S. central bank opened up dollar-liquidity swap lines with Brazil, South Korea and Mexico. It also established a temporary repurchase-agreement facility to allow foreign central banks to swap any Treasury securities they hold for cash.
Despite those efforts the dollar is markedly higher than it was at the start of the year, before the coronavirus shock.
In speaking to reporters on Friday, Trump did allow that a strong dollar can hurt U.S. manufacturing companies. “It’s harder to sell outside of the country,” he said. “It’s a little harder for manufacturers. Sometimes it’s a lot harder.”
But, unlike in the past, he also played up the benefits of a strong U.S. currency.
“Everybody wants to invest in our country,” Trump said, pointing to Friday’s stock market advance. “People want the safety of our country.”
The money is pouring in even though U.S. interest rates are at rock bottom levels, Trump said. “We’re paying almost zero interest, like in some cases zero,” he said.
In highlighting the advantages of a sturdy greenback, Trump in a sense reverted to the stance of past U.S. administrations that viewed a strong dollar as being in America’s interest.
But it may not be for the rest of world, at least for now. “There can be circumstances in which a very sharp appreciation of the dollar is destabilizing for the entire global economy,” Obstfeld said.
©2020 Bloomberg L.P.