Market Insider

Trump just signaled the death of Clinton-era strong dollar policy

Futures Now: Dollar hits 6-week low
Futures Now: Dollar hits 6-week low

President-elect Donald Trump's shock comment that the dollar is too strong suggests the U.S. is about to declare as dead a two-decade policy of publicly favoring a strong currency.

"There's no question that the Trump administration would not want a strong dollar. A strong dollar does nothing good for whatever Trump is basically trying to do," said David Woo, Bank of America Merrill Lynch's head of global rates and foreign exchange research. "Yes, the U.S. fundamental story is bullish for the U.S. dollar, but the problem here is they actually don't want a strong dollar. I think it's going to go up. However, it's going to be a much more volatile climb."

Trump's remarks also took a shot at one of the most crowded trades on the planet — long wagers on the dollar. That trade has been a bet that Trump's policies will reflate the economy, causing interest rates and the greenback to rise. But that dollar move is at odds with building a more powerful American manufacturing base, because a strong dollar makes exports more expensive for foreign buyers.

The dollar also threatens the economic health of emerging-market nations, as the cost of everything there rises, including servicing their dollar-denominated debt.

This is the first time we have a president-elect say the dollar has gone too far. He's saying things and doing things that no president has ever done before.
Marc Chandler
chief foreign exchange strategist, Brown Brothers Harriman

The dollar index gained as much as 6 percent after the election but began retreating in early January and is now up only about 3 percent since Nov. 8. The dollar index was down about 0.7 percent Tuesday on Trump's comment and on pressure from the pound and euro. British sterling rose about 2.7 percent after Prime Minister Theresa May laid out the government's plans for negotiating its exit from the European Union and said Parliament would have to vote on the deal. The euro also rose.

Trump made his comment in an interview in The Wall Street Journal, where he said the so-called border-adjustment tax proposed by Congress is too complicated to enact. That tax is part of a proposed corporate tax overhaul and would tax imported goods at the border at a proposed 20 percent. Some economists say the dollar could rise sharply in response, by as much as 25 percent.

"This is the first time we have a president-elect say the dollar has gone too far," said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman. "He's saying things and doing things that no president has ever done before."

Presidents in recent history have refrained from talking the currency up or down, and Chandler says going back to Clinton Treasury Secretary Robert Rubin, the policy has been for a strong dollar. Even when the dollar's strength created headwinds, administrations have stood by it, at least verbally.

Trump said the dollar was already "too strong," and he pointed a finger at the Chinese currency. "Our companies can't compete with them now because our currency is too strong. And it's killing us," he told the newspaper. Trump said the yuan has been "dropping like a rock," and that recent Chinese moves to support its currency were done "because they don't want us to get angry."

Chandler said the yuan is at a two-month high. It's the fourth week in a row that the dollar has fallen against the yuan. He said the dollar was down 0.75 percent Tuesday against the yuan, which stood at 6.8491 per dollar.

"It raises questions. Are we back to Lloyd Bentsen? He talked the dollar down and the dollar collapsed. Is this a jettison of the Rubin strong dollar policy? We don't know," said Chandler.

Treasury Secretary Jack Lew, in office for just a few more days, was asked on CNBC about Trump's strong dollar comment.

"I think what we've seen over the last couple of years is a U.S. economy that has been on a relative basis stronger than other countries around the world. That has naturally led to a stronger dollar," said Lew.

Events over the weekend and on Tuesday make the confirmation hearing of Trump's nominee for Treasury secretary, Steven Mnuchin, all the more interesting on Thursday.

Woo said he does not expect Mnuchin to tout the strong dollar policy. Instead, he expects him to stop short of it as he did in a recent CNBC interview by more or less saying a strong "economy" is in the best interest of the U.S. That is very like the comment made by Lew on Tuesday.

I think they're now actually intervening to protect their currency, not drive it down.
Treasury Secretary Jack Lew
on the Chinese yuan

Lew also said China has made positive strides. "We pushed them to refrain from doing anything on their currency that would lead people to think they're manipulating," he said. "I think they're now actually intervening to protect their currency, not drive it down."

Robert Sinche, chief global strategist at Amherst Pierpont, said in a note that Trump's comment seems to have been aimed at China, but it has been taken more generally about the value of the greenback. In a note, Sinche said there appear to be differences among incoming advisors in the Trump administration, but it's "probably safe to say that reiteration of the "strong USD policy" is unlikely to be a regular comment by US officials in the years ahead."

Trump's comments, made Friday, came four days ahead of President Xi Jingping's speech at the World Economic Forum in Davos, Switzerland, where he discussed globalization and warned against protectionism on Tuesday. Xi is the first Chinese president to speak at Davos, which acts as a conclave for globalists from all over the world.

"Pursuing protectionism is like locking yourself in a dark room, which would seem to escape the wind and rain, but also block out the sunshine and air," Xi said. "Waging a trade war will only cause injury and loss to both sides."

We don't know how much credence to give it. Some people take him literally. Should people take him literally? The Chinese don't know.
Marc Chandler
chief foreign exchange strategist, Brown Brothers Harriman

Woo said Xi also sounded conciliatory and noted that he recognized the problems globalization brings.

"He said we have to address the consequences that globalization has [brought with regard to] inequality. That shows he understands the political constraints Trump is facing," he said.

Woo said both sides appear willing to talk. But he said ultimately the U.S. and China could be at odds, if Trump's policies succeed in driving up U.S. growth, and the U.S. dollar. That would elevate tensions about the currencies and could mean the U.S. would at that point call China a manipulator.

Markets have been wrestling with how much to believe the protectionist rhetoric from Trump and some members of the incoming administration. Trump has said he wants to impose tariffs, and specifically he has repeatedly targeted cars produced outside the U.S. by both U.S. and foreign automakers.

Trump also predicted in an interview over the weekend that other countries besides Britain will leave the European Union, which he described as an instrument for Germany. He also again called NATO obsolete, though he added that it is important.

"We don't know how much credence to give it. Some people take him literally. Should people take him literally? The Chinese don't know," said Chandler. He said the U.S. has embraced free trade policies since the early 20th century, and NATO was founded after World War II to protect Europe against the threat of the Soviet Union.

Chandler said there are other questions raised by Trump's comments, which are at odds with a number of his appointees. "It also begs the question of where is power going to be. My sense is power is going to be in the White House, not in the Cabinet," he said.

Correction: This story was revised to correct the spelling of Pierpont and Lloyd Bentsen

The currency war is over, China won: Trennert
The currency war is over, China won: Trennert