Whether the dollar's rise after Trump's victory is sustainable depends on what campaign promises he will fulfill upon returning to the White House.
On one hand, he condemned the appreciation of the dollar during his re-election campaign, worrying about its impact on American manufacturing. On the other hand, he vowed to maintain the dollar's global dominance and supported policies that economists and strategists believe could enhance its value.
In June this year, Trump, in an interview with Bloomberg Businessweek, cited wording he occasionally used during his first term, stating, "We have a serious currency problem," and the strength of the dollar poses a "huge burden" on American businesses. Incoming Vice President Vance also advocated for the benefits of dollar depreciation.
The dollar's movement on Wednesday will only exacerbate this "problem," with the Bloomberg Dollar Spot Index recording its largest single-day increase since 2020. The logic behind this move is that Trump's advocacy for higher tariffs, lower taxes, immigration restrictions, and deregulation—such a package of inflationary policy combinations—could lead to higher interest rates, thereby encouraging capital to flow into the dollar.
"If Trump's policies are implemented, there is more upside potential for the dollar," said George Saravelos, global head of FX research at Deutsche Bank AG.
Citi's macro asset allocation team, considering the possibility of the Eurozone becoming a target of U.S. tariffs, recommended shorting the euro against the dollar.
However, over time, efforts to aggressively push for a depreciation of the dollar may prompt other countries around the world to question the dollar's role. Even before the election results were announced on Tuesday, nearly two-thirds of investment professionals surveyed by the CFA Institute expected that in the next 5 to 15 years, the dollar would lose its status as a reserve currency to some extent.
Trump emphasized that he wants to maintain the dollar's dominance, and this year he has repeatedly mentioned that if countries begin to abandon the dollar in cross-border trade and finance, the U.S. will face a threat. In the final weeks of the campaign, he claimed he would impose a 100% tariff on any country that attempted not to use the dollar.
Maintaining the dollar's status appears to be one of 20 commitments in the program released by the Republican Party in July. This was proposed against the backdrop of the BRICS countries, including Brazil, Russia, India, China, and South Africa, working to develop an independent cross-border payment system.
In recent weeks, Trump has stated, "We will maintain the dollar's status as the world's reserve currency, and it is currently under significant attack," adding, "As long as I'm here, I won't let anyone leave the dollar."
Vance asked Federal Reserve Chair Powell last year to explain how ordinary Americans benefit from having the world's reserve currency. In April this year, Vance also told Politico, "'Depreciation' is certainly a terrible word, but what it really means is that American exports become cheaper."
During his tenure, Trump loudly claimed that the appreciation of the dollar harms American manufacturers, but he did not take the most extreme measures, such as market intervention. Hedge fund manager Scott Bessent, who advised Trump's campaign team on economic issues, said on Tuesday that he does not expect any obvious depreciation strategy.
"I wouldn't expect any policies aimed at excessively depreciating the dollar to emerge," said Bessent, who has long been viewed as a candidate for a position in the Trump administration. "Tariffs typically lead to a stronger dollar, so wanting the dollar to weaken would be an economic anomaly," he echoed the analysis of most economists.
Bessent also stated that if the proposed deregulation and expansion of domestic energy supply policies suggested by Trump are approved, inflation rates will fall or drop below the Fed's 2% target, "then interest rates may decline, and the market will drive the dollar to depreciate."
Barclays Bank strategists stated in a report in September that other options for depreciating the dollar would be attempts at fiscal tightening, undermining the independence of the Federal Reserve, or market intervention, whether alone or in collaboration with other governments. The Barclays team's conclusion is that fiscal measures or agreements with other countries will be difficult to coordinate, and the costs of undermining the Federal Reserve's independence and taking action in the market alone are too high. Trump's allies called for achieving this through spending cuts.
"Although the Trump team calls for a 'devaluation' of the dollar, the path to achieving this goal is fraught with obstacles," said Mark Sobel, a retired senior official with 40 years of monetary policy experience who worked at the U.S. Treasury. He believes that the dollar's status is secure because "there are no alternatives in the short term," but "Trump's campaign promises regarding dollar depreciation and imposing a 100% tariff on countries that do not use the dollar will fall flat."
Article forwarded from: Jin Shi Data
