Trump
Aims for a Weaker Dollar Amid Wall Street Skepticism
Former U.S. President Donald Trump is aiming for a weaker dollar in his bid for a second term, but Wall Street economists are doubtful. They argue that his economic policies—tariffs on trade partners and tax cuts that could spur inflation and interest rates—would likely strengthen the greenback instead.
Trump, who has reshaped the GOP in his populist image, has named Ohio Senator J.D. Vance, a fellow strong-dollar skeptic, his running mate. If he wins the election against likely Democratic opponent Kamala Harris, Trump plans to resume his fight against what he views as an overvalued currency, which he blames for America's trade deficit and industrial decline.
However, as Trump discovered during his first term, the presidency needs more straightforward tools to devalue the dollar. Pressuring the Federal Reserve to keep interest rates low or urging other countries to appreciate their currencies might unsettle investors—a risk for a leader who cares deeply about market reactions.
"The main institution standing between Trump and the devaluation is the S&P," said Freya Beamish, chief economist at TS Lombard. "Any aggressive step to devalue the dollar would send shockwaves through the global financial system."
In his first term, Trump frequently criticized other countries for keeping their currencies weak and pressured the Fed to ease monetary policy. On the campaign trail, he remains fixated on this issue, citing manufacturers who claim their products are too expensive due to the strong dollar. Trump is particularly frustrated with the cheapness of Japan's yen and China's yuan.
Despite his rhetoric, banks such as Morgan Stanley and Deutsche Bank predict a Trump win would strengthen the dollar. They argue that looser budgets from proposed tax cuts would necessitate higher Fed rates, supporting the greenback. Tariffs would have a similar effect by making foreign goods less attractive, reducing demand for other currencies.
Trump's economic advisers are crafting plans for a dollar-focused trade policy. Potential Treasury secretary picks, such as Robert Lighthizer and Scott Bessent, are exploring options to balance the U.S. external deficit, possibly including capital controls and friend-sharing policies that reward trade partners who support a weaker dollar.
One direct approach could be currency market intervention, either verbally or through dollar sales by the Treasury. However, the Treasury's $206 billion Exchange Stabilization Fund may not be enough. George Saravelos of Deutsche Bank estimates that effective devaluation would require selling "multiple trillions" and imposing capital controls. The U.S. and its G7 allies have agreed not to unilaterally manipulate currencies, complicating any such efforts.
A second option is pressuring the Fed, whose interest rates significantly influence the dollar's value. If Trump's policies—tax cuts, tariffs, immigration control—are inflationary, the Fed would typically raise rates, strengthening the dollar. Any indication that the Fed won't follow this path could lead to a dollar selloff. While Trump has shown no hesitation in criticizing central bankers, formal efforts to curb Fed independence could undermine investor confidence.
Trump might also use tariffs as leverage, particularly against China, to push other nations to appreciate their currencies. Some analysts believe this could work if other key economies are already inclined to support their currencies. However, there is a risk that U.S. trade partners might retaliate with their own tariffs, potentially sparking a trade war.
Another key issue for Trump is maintaining the dollar's status as the world's reserve currency, a goal that might conflict with his desire for a weaker greenback. Since 1945, the dollar has served as global money, but there is growing interest in alternative currencies, driven by both U.S. adversaries and allies.
Trump remains committed to keeping the dollar as the world’s reserve currency, despite his running mate Vance's reservations. "I hate when countries go off the dollar," Trump told CNBC in March. "I would not allow countries to go off the dollar."
As the campaign unfolds, Trump’s strategies and their impact on the dollar will be closely scrutinized by economists, investors, and international partners.
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