Let’s investigate the claim Trump’s ‘America First’ Puts the Dollar Last.
The administration’s “irreconcilable” goals of cutting trade imbalances while funding a large fiscal stimulus program pose the biggest challenge to the international monetary system since the breakdown of the Bretton Woods agreement in the 1970s, George Saravelos, global co-head of FX research at Deutsche Bank, wrote in a note. The only way to resolve these conflicting objectives is via a weaker dollar, he said.
That’s because the U.S. will probably struggle to attract sufficient foreign capital to fund its twin deficits, and that lack of appetite will likely translate to more currency weakness, he said.
One Variable Analysis
The problem with Saravelos’ analysis is that it focuses on one variable. Call the “twin deficits” the budget deficit and the trade deficit two variables if you like.
Possible Action-Reactions
- The Fed could hike rates faster than expected, and that would be dollar supportive. In theory, tariffs will raise inflation, forcing the Fed to hike faster.
- The ECB could slow tapering or hike slower than expected, and that would be dollar supportive.
- There could be a currency crisis starting in Japan, Italy, or China, that could strengthen the dollar.
- The Fed could hike rates slower than expected, and that would pressure the dollar.
- The ECB could hike faster than expected.
Those ideas are not mutually exclusive. Two and four can both happen. It’s also what I expect.
The least likely item above is point number 5.
Looking back at point one, there are short-term and long-term impacts of Trump’s policy. Perhaps there is a whiff of inflation with rising interest rates, then a global recession.
A currency crisis is a given at some point, we just do not know when. It could be a decade away or start three months from now.
Air Pocket
Technically speaking the dollar is in the middle of no man’s land. The last four times the US dollar index has been at this level, it has broken lower. The next level of support is not until 80.
Note the classic double-bottom at 71-72. If the dollar breaks that level, look out below. I do not think we get that far but a target of 80 seems reasonable.
Mike “Mish” Shedlock
The inflation is in govt (taxes, fees, civil asset forfeitures, fraud, corruption, and hubris).
The Fed is not and will not hike rates to fight inflation. They are raising rates to salvage pensions, versus worrying about the IMF’s biggest concern, blowing up the balance sheets of foreign entities holding too much dollar-based debt.
The coming financial crisis will be caused by a strong dollar, not a weak one. No matter how incompetent our govt is, we cannot stop a rising dollar, because the rest of the world has more committed Marxist than we do.
Saravelos said: “The only way to resolve these conflicting objectives is via a weaker dollar. That’s because the U.S. will probably struggle to attract sufficient foreign capital to fund its twin deficits, and that lack of appetite will likely translate to more currency weakness”.
trade war ?US economy runs almost entirely on borrowin/printing money and handin out checks 1st of the month so folks can buy chinese crap at home depot and walmart.Chinese economy runs entirely on selling junk to americans,where would you rather be in a trade war?Forced to print even moar trillions to keep EVERYTHING propped up or forced to close tens of thousands of factories and lay of millions of what is basically slave labor?I choose the former