Could the Trump greenback become a problem?

Author:Smick, David M.
Position::FROM THE FOUNDER
 
FREE EXCERPT

At the beginning of February, President Donald Trump reportedly called his national security adviser at 3:00 a.m. to ask whether a strong dollar was good or bad for the economy.

He was right to ask: The Trump dollar could strengthen significantly and become a global economic and financial headache--and trip up the president's entire economic policy.

Let's begin with this historical comparison: The Trump stimulus plan seems to be a version of the Reagan domestic agenda (big tax stimulus, higher government spending, and deregulation). In the early 1980s, those policies produced a soaring dollar. By the mid-1980s, the greenback had appreciated so much that U.S. policymakers began to worry about an exploding trade deficit and potential trade war, particularly with Japan. In response, the industrialized world (led by the U.S. Treasury) organized the Plaza and Louvre Accords--international agreements to use foreign-exchange intervention first to stabilize and then to bring down the dollar's value.

This comparison to the Reagan years is the prime reason why, from November 8, 2016, through January 3, 2017, the U.S. dollar index jumped 6.43 percent.

But here's the problem: A soaring dollar in today's global economic and financial world will have an impact on a lot more than trade imbalances. It could affect the value of global debt, the cost of energy, and, perhaps, the stability of the world's banking system. The potential for damage is significant.

So buckle your seat belt. In both the 1980s and 1990s, a soaring dollar result was serious worldwide financial volatility. True, the president's protectionist rhetoric and anti-foreigner sentiment could have an effect in reversing capital inflows, making a rise in the dollar unsustainable. But recent experience (NATO, one-China policy) shows Trump's bark is often more extreme than his bite.

If the dollar surges, it is not clear a Plaza Accord II is even possible. Conditions aren't the same as those that prevailed in the era of cooperation of the 1980s, when emerging markets, including China and India, represented only 20 percent of the world's gross domestic product. Today, they account for almost half of output. Many, if not most, of these nations are hardly receptive to U.S. leadership on anything. Because exports represent from 25 percent to 45 percent of their GDP, the world's emerging markets, as well as most of the developed world, seem committed to a relatively weak currency against the dollar...

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