“We have a big currency problem,” Donald Trump tells Bloomberg Businessweek. The US presidential candidate flags the “strong dollar/weak yen, weak yuan” as a barrier to a revival in US manufacturing. Since the 1990s, US Treasury secretaries have generally taken the view that market forces should determine exchange rates, says Alan Rappeport in The New York Times. In 1995, Clinton administration official Robert Rubin even declared that “a strong dollar is in our national interest” as it helps to reduce government borrowing costs.
What a weaker dollar means for the US economy
Trump’s running mate, Ohio senator J.D. Vance, argues that a strong currency is effectively “a subsidy for US consumers but a tax on American manufacturers”. He wants the balance to be re-set in favour of America’s “hollowed-out industrial base”. A Trump White House would only have limited ways to weaken the currency, since interest-rate policy is in the hands of the independent Federal Reserve, the US central bank. One approach could be “to use the threat of tariffs to compel other countries… to strengthen their own currencies”.
In 1985, the Reagan administration successfully persuaded Japanese and European leaders to do just that, says Kevin Dugan in The New York Intelligencer. The dollar fell 40% in the wake of the “Plaza Accord” and the US trade deficit closed. Yet Plaza was a deal done among Cold War allies – a similar attempt to devalue the dollar today would instead trigger a self-defeating race to the bottom with China.
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A weaker dollar would also raise prices. The Plaza deal sent US inflation above 5%. Trump’s programme of “pressuring the Fed to lower interest rates, putting up tariffs, and depreciating the dollar… are about the most inflationary things you can do”, says Jeffrey Frankel of the Harvard Kennedy School. The past few years have shown that high inflation is “politically toxic”.
Trump’s other policies directly contradict his preference for a weaker greenback, says Jonas Goltermann for Capital Economics. Tariffs and tax cuts tend to boost the US currency, as shown by the dollar’s strength during Trump’s first term in office. There is some limited scope for officials to talk down the dollar on currency markets, but not even the president of the US can set exchange rates by diktat.
Still, with US interest rates set to fall, Trump may not need to do much to achieve a weaker dollar. Many currency analysts think that it is due a fall anyway. Trump and Vance may “be pushing at an open door”, agrees Felix Martin for Breakingviews. In trade-weighted, inflation-adjusted terms, the greenback has appreciated more than 30% in the past decade and is close to its richest in 40 years.
On balance, America benefits hugely from the dollar’s strength, says The Economist. It has helped to insulate US households from the inflationary surge that Europeans have suffered. It lowers US government borrowing costs. It does hamper exporters, but since the 1990s, America has still greatly outperformed other developed economies. Vance’s attempt to “cast America as a victim of the global financial system” is “almost laughable”.
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