Economic chronicle: under Trump, a dollar in all directions

Paradox among others regarding the American presidential election: while Donald Trump promises to bring down the dollar, the markets which anticipate his victory are on the contrary raising its price, what is now commonly called the “Trump Trade.”

Illogical? Not so much. First, the exchange rate is beyond the control of whoever is elected. If this variable obeyed some presidential attitude, it would rather depend on the direction of future economic policy that it would depend. However, with regard to the promises, essentially budgetary and fiscal on this point, of candidate Trump, it is clear that they are more likely to immediately push the dollar upwards, even if it means producing the opposite effect. in the longer term.

In the short term, investors have good reasons to bet on a rise in the dollar: if Trump wins, the stock markets will soar and the domestic economy will accelerate. But then the time of reckoning will come: inflation can only rise again in such a context, the Federal Reserve would be obliged to raise interest rates (and thus pull public debt securities towards the low), and general attention could well end up focusing on the staggering scale of the public debt (123% of gross domestic product), which the external creditors, particularly numerous (they hold more than a third), then risk viewed with growing suspicion, and more and more people find themselves refraining from repurchasing. This would be likely to cause a relapse, perhaps pronounced, of the greenback.

But we must put things into perspective, in several respects. First, if the debt is colossal, certainly less than the Italian one as a percentage of GDP, but higher than that of France, it has tended in recent years to reduce in relative terms, after having progressed significantly under the first mandate Trump to the point of approaching 133% in the 2nd quarter of 2020. This is because the strong growth of the American economy (apart from the 1st half of 2022, Covid requires) has caused this proportion to decline, when in absolute figures the federal debt continued to increase, to the point of now exceeding $35.7 trillion.

Then, these are raw numbers. However, the United States also holds public debt securities of other states, which brings their net debt to less than 29,000 billion. Finally, the American Treasury effortlessly refinances the federal debt, as the rest of the world’s appetite for its bills and notes continues for the reasons we know (securities considered safe, highly liquid, with a comparatively high yield, without take into account that the dollar remains the reserve currency par excellence and the one in which most trade throughout the world is denominated and settled).

Still. As a British colleague notes, the combination of inflation, out of control deficits and institutional breakdowns caused by a president disrespectful of current standards “could precipitate the day when foreigners worry about lending money without limit to the US Treasury”*. Under Reagan, we remember, a dollar that had become too strong had suffered a marked fall after the Plaza Accords (March 1985). Again repeat…

* À second Trump term comes with unacceptable risks (The Economist du 2 novembre)

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