Donald Trump got Wall Street’s attention last week by saying the U.S. dollar is “too strong,” warning that a soaring greenback has “disadvantages” for U.S. companies that do a lot of business abroad.
The value of the dollar versus a basket of foreign currencies, including Japan’s yen, the British pound and the euro, has risen more than 25% since the start of 2014 and is up 3.1% since Election Day.
Those sharp gains include a nearly 1% drop Tuesday after Trump suggested that he prefers a weaker buck, which put the dollar in the red for 2017 and at its lowest level since early December.
In Friday trading the dollar rose 0.4%. Like most financial assets, the dollar’s value is determined largely by market forces, such as the difference between the growth and investment outlook in the U.S. compared to other countries.
While Trump, or any president, doesn’t fully control whether the value of the dollar rises or falls, a president can move the dial in the short-term by jawboning markets. The U.S. Treasury can also impact the dollar’s value by being active in the foreign currency markets, as can the nation’s central bank via the level of interest rates.
Here’s several things you should know about U.S. dollar policy:
- Higher dollar not good for U.S. companies that sell overseas.
- The stronger the dollar the more expensive U.S. products are when sold abroad in markets with cheaper currencies. Consumers in those markets may choose to buy less expensive, non-American goods. Fewer foreign sales of American products translate to less profit for U.S. companies and fewer new jobs.
- The broadStandard & Poor’s 500 stock index, which is filled with large American companies such as retailer Walmart and heavy equipment maker Caterpillar, gets more than 43% of its total revenue from foreign sales, according to S&P Dow Jones Indices. A strong dollar, Trump told the Wall Street Journal last week, is “killing” the competitiveness of U.S. businesses in places like China.
- Strong greenback could derail Trump’s growth plans.
- Ironically, the dollar’s rise has been partly a result of Trump’s proposed policies – corporate tax cuts, less regulation and more government spending.
- In short, Trump’s policies that push up the U.S. dollar could offset the benefits – and impede the success – of “Trumponomics.” If foreigners can’t afford to buy products and services exported from America, it could derail Trump’s plans to revive U.S. manufacturing. Recent dollar strength has also been driven by theS. Federal Reserve’s stated plans to raise short-term U.S. interest rates at least three times this year, which would boost the current yield of 0.75% to 1.5%.
“The real conundrum is that Trump’s proposed policies, which he believes will create jobs in the U.S. while accelerating economic growth to the 3%-4% range, will, if enacted, come with some undesirable side effects,” says Michael Farr, president of money management firm Farr Miller & Washington.
- Talking down the dollar breaks from precedent.
Trump’s public preference for a weaker dollar contrasts with normal U.S. policy to promote a “strong dollar.”
U.S. presidents normally refrain from talking specifically about the dollar, preferring to leave such commentary to the Treasury secretary, who normally sticks to the common refrain, “the U.S. supports a strong dollar.”
A strong dollar, of course, signals strength and projects confidence in the U.S. The shifting message from Trump creates some confusion on Wall Street and a fresh uncertainty as to what the new White House administration will say and do next.
“It’s pretty unprecedented to hear comments by a president or president-elect to support a weaker dollar,” says Frederick. USA TODAY