President Donald Trump wants a cheaper dollar, saying earlier this month the United States should match what he says are efforts by other countries to weaken their own currencies – giving them an unfair trade advantage.

The President says the US should follow other countries with attempts to weaken the US dollar in order to claw back its advantage in the global currency markets.

Meanwhile, the International Monetary Fund has said that the dollar, which is approaching a multi-decade high, is valued at least 6% higher than an analysis of fundamentals would normally indicate.

Trump has been advised that taking measures to drive down the price of the dollar would aid US businesses on the global stage by decreasing the cost of exports, thus helping his re-election campaign next year.

The Federal Reserve has recently invited rebuke from Trump for raising interest rates, with the president blaming the rate hikes for containing US economic growth. In contrast, many analysts believe that a rate cut from the Fed, which is likely to happen at the end of this month, will do little to cheapen the dollar significantly.

But initiatives to intervene in the price of USD would have undesirable consequences as well: other countries may push back or take counteractive measures. The actions could also compromise the dollar’s status as the world’s reserve currency, which could in turn have knock-on effects across the global economy.

Question marks also hang over how much power the president has over and above the powers of the US central bank, which is an independent body that holds the key to many of the plays that could weaken the dollar.

One measure the US Treasury could take to achieve its price objective would be to buy foreign currency using its USD reserves, a course of action that has not been employed since a September 2000 purchase of nearly $1.3 billion in foreign currency, mainly to help prevent a collapse of the euro.

But as Paul Ashworth, an economist at Capital Economics recently pointed out, “There are plenty of hedge funds that have more clout than that.”

While on the flip side, economists also point to a possible appeal to congress to lift the borrowing limit of the Treasury, allowing the government to raise significant cash with which to purchase forex. Under such circumstances, the US would have a major advantage over other countries in a currency war.

Dalia Hilmi
Author

Write A Comment