A couple of weeks ago, Donald Trump made a statement related to the USA’s money-and-credit policy. This leads us to believe that in the near future Washington may well abandon the policy leading to a stronger dollar.
Gavyn Davis, who is a former Goldman Sachs employee, CEO of Fulcrum Asset Management, and a cofounder of Prisma Capital Partners, thinks that Donald Trump revealed his attitude to Washington’s existing money-and-credit policy. According to the expert, this means that Trump’s administration is going to abandon the strong-dollar policy launched in 1995 when the U.S. Dollar was rather weak against other major currencies.
To be more specific, President Trump said that the “strong dollar” expression sounds good by the dollar is getting too strong, which means that American companies are having a hard time competing with other companies from those countries that can easily devalue their national currencies. He also welcomed the Fed’s low-rate policy and said that Janet Yellen may stay in charge of the Federal Reserve.
Another important thing to keep in mind is that President Trump refused to keep his word and call China a currency manipulator. He hinted that Washington is ready to make concessions in the field of trade policies in exchange for reaching a compromise with China over North Korea. Also, the other day, the U.S. Department of the Treasury released another 6-month report on the currency policies by America’s key trade partners.
The Department warned several countries (China, South Korea, Taiwan, Germany, Switzerland, Japan) that their monetary policies are monitored. However, the USA is probably not going to take serious actions against the manipulators in the near future. It may well be that Trump’s administration still hopes that America’s possible change for trade protectionism may force some of them into letting their national currency appreciate against the U.S. Dollar.
At the same time, chances are that Donald Trump has finally realized how miserable and useless those protectionist steps may be when their impact on the national economy is reduced to nothing by a strong dollar. That’s why Washington is trying to weaken the national currency. However, some experts still believe that the pressure coming from the top is unlikely to change the game. To cause major changes in the existing currency tendencies, it’s necessary to make changes to the economic policies in other fields.
The U.S. Dollar exchange rate is changing despite the Fed’s strategic line. In 1995, the strong-dollar policy used to be the policy aimed at keeping the U.S. bond yields low to avoid criticism from America’s trade partners. Over the period of 1995 through 2002, the U.S. Dollar appreciated by 30%, mainly due to tougher money-and-credit policies and tech boom.
However, later on, the Fed’s quantitative easing made the dollar’s real effective exchange rate drop to a major low. In 2013, the markets started panicking after the quantitative easing came to an end. This is when the dollar started appreciating again. That partially helped the U.S. economy show slightly higher-than-expected growth while the U.S. policies didn’t match those of America’s trade partners.
When estimating the ratio between the U.S. Dollar and most other currencies over the long term, it becomes clear that the American currency is slightly overvalued at this point, around 9-10% to be more specific.
Even though this is not much of an imbalance, this can explain Trump’s recent statements saying that today’s exchange rate is toxic for the competitiveness of the American economy. That’s why we may well see some changes in the USA’s currency strategies.
