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Forget the Fed, dollar strength will be dictated by Trump's foreign policy, expert says

US President Donald Trump and Russia's President Vladimir Putin on the sidelines of the G20 Summit in Hamburg, Germany, on July 7, 2017.
Saul Loeb | AFP | Getty Images
US President Donald Trump and Russia's President Vladimir Putin on the sidelines of the G20 Summit in Hamburg, Germany, on July 7, 2017.

The dollar's direction will be swayed more by U.S. President Donald Trump's foreign policy than it will be by the next chair of the U.S. Federal Reserve, according to economist Barry Eichengreen.

The dollar hit a three-month high against a basket of other currencies on Friday with investors now looking ahead to December, when the Fed will resume increasing the interest rate amid data showing a strengthening home economy. Expectations have also grown that the next fed chair appointed by Trump could be someone who favors a faster pace of rate increases, thereby strengthening the dollar.

But Eichengreen, a professor of economics and political science at the University of California, Berkeley, told CNBC on Monday that the dollar's future value would be determined by U.S. foreign policy rather than by domestic issues.

"People are focusing too much on the next Fed chair," Eichengreen said. "Whoever it is, (he or she) is going to be a monetary mainstream person and I don't think that will move the dollar too much. What I do think will move the dollar is geopolitics," he said.

Trump visits Asia

Eichengreen's comments come as Trump prepares to make his first visit to Asia since becoming president.

The trip, during which North Korea is expected to dominate the agenda, starts on Friday and will see Trump visiting Japan, South Korea, China, Vietnam and the Phillippines. It comes amid heightened tensions between the U.S. and North Korea following the communist dictatorship's repeated nuclear tests in defiance of international sanctions.

Eichengreen said that Trump's administration had two main concerns about Asia, North Korea and trade with China, and said the former was more important.

The political rhetoric between the U.S. and North Korea has escalated in recent weeks to the point where Trump said the U.S. was "totally prepared" to use "devastating" military action against the country if necessary.

For its part, North Korea — a country largely politically and economically isolated, although it still has waning support from China — said that the U.S. had "lit the wick of war." Over the last few days, however, an impasse seems to have set in with neither side adding fuel to the fire.

Speaking in Seoul on Friday, U.S. Defense Secretary Jim Mattis said that "diplomacy remains our preferred course of action." But he added: "Make no mistake — any attempt on the United States or our allies will be defeated."

Eichengreen said that the U.S. would have to work with China over North Korea, and would have to compromise. "The U.S. needs Chinese cooperation on North Korea and, in addition, it will have to give North Korea something in return for talks. That something will be the missile withdrawal, U.S. troop reductions on the Korean peninsula, something will have to be offered."

Currencies

Eichengreen's latest book "How Global Currencies Work: Past, Present and Future," co-authored with Arnaud Mehl and Livia Chitu, focuses on Trump's impact on the dollar while its publication comes amid scrutiny of his administration.

Trump has sought to undo much of the previous Democrat administration's domestic policies, including recent proposals to overhaul the country's taxation system, while also proposing a change of direction for U.S. foreign policy, such as his "America first" ideology.

But Eichengreen said a lot was riding on Trump's ability to push changes through.

"The markets are concerned about Trump and the dollar," he said, adding that any lack of tax reforms from the Republican administration "would be a disaster for the Republicans more broadly."

Eichengreen believed that there would be a "recovery of the dollar because of the tax deal and modest stimulus to the economy" but warned that "in the longer run, these things run glacially."

He said that China's currency could play an increasingly dominant role in global markets, with the president [TRUMP?] effectively "opening the door for China and its currency (the Renminbi) to play a larger role." In global markets, however, the dollar would not necessarily lose its dominance as the global reserve currency.

"The point we make in the book is that international currency status is not a 'winner takes all' game. There is room for several national currencies in the global economy," Eichengreen said.