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We will soon find out whether Donald Trump has changed his tune on the dollar.
In his first term, the comeback president had a clear preference for a weaker buck. On one notable occasion in 2019, when European Central Bank chief Mario Draghi was dropping hints of more monetary stimulus, the then-president responded with his trademark poise, tweeting that Draghi’s comments “immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”
Trump’s foray in to dollar policy — traditionally the preserve of the Treasury secretary — prompted that immediate drop in the euro to reverse and left the market in no doubt what the leader of the free world wanted to see.
Fast forward to the end of 2024, and we are invited to believe that Trump 2.0 is different. In October, the man who has gone on to become the nominee for the Treasury job — Scott Bessent — indicated that Trump is actually a free markets fan after all.
“The reserve currency can go up and down based on the market. I believe that if you have good economic policies, you’re naturally going to have a strong dollar,” Bessent said.
But Trump is a norm-breaker and a master of signalling policy shifts on social media. It’s not hard to imagine him requesting or demanding dollar-weakening measures from major trading partners of the US in return for lenience on tariffs, perhaps through a grand Mar-a-Lago Accord — an echo of the dollar-squashing Plaza Accord of 1985. Whether that would work is another question entirely, particularly given currency relations are a very delicate game of diplomatic chess, not Trump’s obvious strength.
If Trump does still love a weak dollar then the past few weeks have not gone his way. The DXY dollar index, which tracks the buck’s value against a basket of other currencies, is up by close to 3 per cent since election day, carving out gains against precisely those currencies likely to be in the path of the trade tariffs bulldozer, such as the euro and Chinese renminbi.
Figuring out where currencies are heading involves more than just comparing economic growth trajectories and interest rates, but honestly not much. (Just don’t tell the currency analysts or they will email me to complain.)
Under that framework, the case for the dollar to keep on pushing higher is obvious. America is already on a higher growth trajectory than much of the rest of the world, even before further stimulus under the incoming president. If Trump does slap large tariffs on imports, that leaches growth away from those other countries and will probably mean interest rates there will drop in response.
Already, US inflation is proving persistent, ticking up to 2.7 per cent on an annual basis in data released this week. That leaves December’s quarter-point rate cut from the Federal Reserve still in play, but undermines the case for a long series of further cuts in to next year. By contrast, investors expect the ECB to keep on hacking rates back in an effort to counteract the risk of recession, taking deposit rates potentially as low as 1.5 per cent, from 3 per cent now.
“The US data is already pointing in a significantly more inflationary direction than just a few months ago,” Deutsche Bank analyst George Saravelos wrote this week. Meanwhile, the ECB could soon start to worry about inflation sinking below its 2 per cent target, he said. “Bottom line, even without Trump, there is more Fed/ECB repricing to go and pressures remain to the downside” for the euro against the dollar.
For China and the renminbi, a similar story applies. The economy is stuck in a hole and likely to struggle further if Trump goes all-in on tariffs. This week, China’s leaders called for more fiscal and monetary stimulus. Deliberate efforts to weaken the renminbi by buying dollars are a well-trodden tactic for Chinese authorities and analysts say they would not be at all surprised to see evidence of that dotted throughout next year.
So, as ever, the ball is in Trump’s court. Does he lash out at overseas stimulus measures as he did the last time he was in office? Does he decide that dollar strength is a price worth paying for his tariffs? Investors don’t know, but they do see a decent chance that this gets nasty.
“This could turn in to currency wars,” said Salman Ahmed, a macro strategist at Fidelity International. “Right now, we’re seeing [the Fed and the ECB] focusing on different realities because of the political changes and fiscal divergence.”
One moderating factor here could be that markets have already priced in a lot of Trump. The dollar index is already up 6 per cent since late October — roughly the time when investors grew more confident that Trump would win. This could suck some of the wind out of the dollar’s sails next year. If it does not, a period of currency diplomacy by social media lies ahead again.