Opinion | Second Trump presidency would pose little threat to King Dollar
8 Min Read
In global foreign exchange markets, particularly in developing economies, it is often dubbed a “wrecking ball”. The US dollar, the world’s dominant reserve currency, is living up to its formidable reputation.
The Bloomberg Asia Dollar Index, which tracks the performance of a basket of Asian currencies against the US dollar, has lost 10.7 per cent since the beginning of 2022. Many currencies, including the Malaysian ringgit and the Indian rupee, have fallen to multi-decade or record lows this year.
However, attention has focused on the region’s two leading currencies. Since the start of 2022, the Japanese yen has lost more than 30 per cent against the US dollar, helping put an end to decades of deflation but eroding Japanese households’ purchasing power. The Bank of Japan, which is struggling to normalise monetary policy, has been forced to intervene in the currency markets to prop up the yen to little avail.
Meanwhile, China’s yuan – an anchor of stability for other currencies in Asia – is trading close to its weakest level versus the US dollar since the end of 2007. This is fuelling capital outflows and making it difficult for the People’s Bank of China to ease monetary policy to help counter the country’s economic downturn.
Asian policymakers have been waiting for the dollar to weaken ever since the United States was expected to fall into recession early last year. Yet a resilient economy prevented the US Federal Reserve from cutting interest rates, contributing to the persistent strength in the dollar.
However, the loudest calls for a weaker dollar are coming from economic nationalists inside the US. Former president Donald Trump, who has long sought a cheaper currency to reduce the large US trade deficit and make it easier for manufacturers to compete globally, has made dollar depreciation a central theme of his presidential election campaign.
02:11
Trump vows high tariffs on China-made cars in his first speech after assassination attempt
Trump vows high tariffs on China-made cars in his first speech after assassination attempt
Meanwhile, Ohio Senator J.D. Vance, Trump’s running mate, has even questioned the merits of the dollar being the world’s main reserve currency. In an interview with Bloomberg last month, Trump singled out the sharp falls in the yen and the yuan as “a big currency problem” that imposes “a tremendous burden” on US companies selling their products abroad.
Many prominent investors and corporate bosses continue to believe Trump’s bark is worse than his bite. Yet a second Trump administration would have a bigger impact on economic policy, partly because Trump would claim a stronger mandate to enact radical change but also because his team has a plan for what to do if he returns to the White House.
Trump’s first term in office has already had profound consequences for US institutions and policies. Having put three US Supreme Court justices on the bench to create a 6-3 conservative majority, Trump is now benefiting from the court’s controversial decision to grant him a large degree of immunity from criminal prosecution over his efforts to overturn the 2020 presidential election.
Moreover, Trump played a crucial role in establishing the hawkish bipartisan consensus on China, resulting in US President Joe Biden’s decision to keep Trump’s trade tariffs in place and raise them sharply on Chinese semiconductors and electric vehicles. Given his recklessness and contempt for institutions, what is stopping Trump from taking drastic measures to devalue the US dollar, possibly by curbing the Fed’s independence?
While US political risk leaves no room for complacency, the US dollar is more insulated from Trump’s policy priorities. For starters, the Democrats’ chances of winning the presidency received a major fillip from Biden’s decision to end his re-election bid. According to the results of a Bloomberg/Morning Consult poll, US Vice-President Kamala Harris has already wiped out Trump’s lead in key swing states.
Second, Trump’s main policies – more punitive tariffs, tax cuts and draconian measures to curb immigration – are inflationary and would put pressure on the Fed to resume monetary tightening. Expectations of higher borrowing costs would cause the dollar to strengthen.
Third, any unilateral action to devalue the dollar would be highly costly and risky given the size and liquidity of global currency markets.
A report by Deutsche Bank on July 22 noted the US dollar would need to drop by as much as 40 per cent to close the trade deficit. If Trump set up a foreign exchange reserve fund, it would need to buy a staggering US$2 trillion worth of foreign assets, requiring heavy issuance of US debt at a time when the government is at risk of a fiscal crisis. Even bigger sums would be needed to drive down the US dollar. “The market is far too big even for the US federal government to take on,” Deutsche Bank said.
US Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board Building in Washington on July 31. Policies proposed by former US president Donald Trump would reduce the US central bank’s independence, risking a further crisis of confidence as US monetary policy becomes contingent on political decisions. Photo: AP
Fourth, any attempt by Trump to bully the Fed into weakening the US dollar, either by pressuring it to ease policy aggressively or introducing measures to restrict its independence, would encounter stiff opposition. It is unlikely that Trump, who loves to take credit for stock market rises, would be willing to risk a financial meltdown.
Fifth, and most importantly, the US dollar is a safe haven asset, which means it strengthens during periods of instability, even if the US is the source of the turmoil. As research firm TS Lombard noted, “The world wants US assets.” While this allows US politicians, in particular Trumpist Republicans, to act recklessly, it helps insulate US assets.
The best hope for Asian policymakers is that the Fed starts lowering interest rates in September, putting downward pressure on the US dollar. A second Trump presidency that wreaks more havoc and undercuts the dollar’s safe haven appeal is in nobody’s interest.
