Donald Trump’s chaotic economic policy weakens the greenback. On the foreign exchange market, the euro/dollar fell 9.4 % since its inauguration, from 1.0414, on January 20, to 1.1396 dollars on April 15. The Doxy dollar index, which measures its value compared to a basket of six major currencies, fell from 109.35 to 100.10 over the same period.
This decrease should delight the American president and his administration, convinced that a too strong dollar is one of the causes of the economic imbalances from which the United States suffers. Stephen Miran, a great architect of Donald Trump’s economic policy, pleaded in November for a depreciation of the dollar, arguing that his persistent overvaluation made exports less competitive, the imports cheaper and handicapped the domestic manufacturing industry.
« A decrease in the dollar would strongly strengthen the competitiveness of American exports and generate additional growth »confirms Benoît Gérard, rate strategist at Natixis CIB. For example, with a euro/dollar parity of 1, an American product costing 100 dollars is sold 100 euros in Europe. If the dollar depreciates at 1.20, this product is sold at a more competitive price of 83.33 euros.
The persistent vigor of the dollar is often seen, across the Atlantic, as an aggravating factor in industrial decline initiated in the 2000s.
« The deindustrialisation of the United States is mainly linked to the rapid industrialization of China. By developing a growth strategy focused on external demand and exports, Asian power has destabilized world trade and displaced industries outside of American territorytempers Xavier Ragot, president of the French Observatory of Economic Conditions (OFCE). But it is true that the strong dollar indirectly supported this development. »
“The drop in the dollar, matching the customs prices, aims to influence the size of the external deficit, by adding imports. The idea is to encourage companies to settle in the United States »underlines Philippe Waechter, chief economist of Ostrum AM, a company for management of financial assets.
The trade deficit (difference between imports and exports) amounted to $ 122.7 billion in February. Several tools can be used to weaken a currency, at the forefront of which is monetary policy, as evidenced by the repeated calls from Donald Trump to Jerome Powell, president of the American Central Bank (FED), to lower its guiding rates. Such a decision reduces the profitability of dollar investments, decreases the attraction of money for foreign investors and thus contributes to its depreciation.
Pressures on the Fed
For the moment, the Fed has not given up to the President’s pressures, now its rates between 4.25 % and 4.50 % in March. The American central bank remains an institution independent of the executive power, even if Donald Trump is increasingly pressing.
On the merits, the increase in customs duties decided by the American president, who creates inflation, makes the drop in complicated rates because a monetary tightening is necessary to combat inflation. The United States can intervene in the currency markets via the exchange stabilization fund. But its size ($ 40 billion) is too limited to have a significant influence.
Central banks can no longer act together, depending on the bilateral tariff negotiations that their country will lead with Washington
In November, Stephen Miran had mentioned the idea of signing so-called “Mar-A-Lago” multilaterals (named Donald Trump’s residence located in Florida), by analogy to the 1985 Plaza agreements where several major economies had agreed to coordinate to devalue the dollar.
« One can imagine negotiations where the United States, during commercial discussions, would encourage certain countries to buy American while working on the markets to lower the dollar »SUPPUTE Charles-Henri Colombier, director of the conjuncture pole and prospects for Rexecode, a think tank close to employers.
As for an international coordination of central banks, as was the case after the Plaza agreements, it today seems very hypothetical in the eyes of Philippe Waechter, which considers that they can no longer act together, being dependent on the bilateral tariff negotiations that their country of attachment will lead with Washington.
The dollar remains the main global reserve currency
The United States will also have to deal with a contradiction: the depreciation of the dollar, which reduces the yield and attractiveness of American treasury bills, and complicates the refinancing of a debt which is around 36,000 billion dollars. A disengagement of foreign investors and creditors would weaken public finances already under pressure. This is undoubtedly what prompted Washington to initiate a budget recovery strategy, combining drastic cuts and increase in customs revenues.
As we have seen, Donald Trump wants to lower the dollar … and he has already succeeded in recent weeks. A success for the American president? No, estimates Xavier Ragot. This drop has indeed taken the worst way:
« By sowing uncertainty, Donald Trump weakens the United States and feeds the recession. Its brutal policy, without clear economic vision, worries more than the fall in the markets. If the dollar vacillates, the world’s order is in danger. »
The greenback (nickname of the dollar) remains the main global reserve currency. Admittedly, its share increased from 70 % to 60 % in 25 years in exchange reserves of central banks. But it remains essential in most world exchanges.
China has the means to reply
Can the greenback still drop? « The dollar is still far from its exchange rate of theoretical balance and could depreciate up to 1.30 to 1.40 dollars for one euro ”note Charles-Henri Colombier. The historical evolution of the index Dxy indicates that the greenback remains high. One can imagine that he finds his levels of 2010-2014, where Euro/dollar parity oscillated between 1.20 and 1.49, which would constitute a drop in order of 30 % compared to the current situation.
Countries dependent on exports to the United States such as Germany or Vietnam would see their degraded competitiveness
The economic consequences of such devaluation are potentially important. For the United States, it could result in inflation for consumers and businesses, a slowdown in domestic consumption and a decline in imports. The business partners of the country of Uncle Sam would also be affected. Countries dependent on exports to the United States such as Germany in Europe or Vietnam in Asia, would see their competitiveness degraded and would have more difficulty eating their products.
For its part, China has, on paper, the ability to quickly react to the fluctuations of the US dollar thanks to its exchange policy. The Chinese central bank fixes a reference rate around which the yuan can evolve in a margin of 2 %every day, which allows it to adjust the level of its currency according to market conditions and preserve the competitiveness of its exports.
