Trump plans to lower US dollar if elected

By the OFX team | 10 July 2024 | 6 minute read

Donald Trump is seeking to supercharge the US economy, and his focus is reducing the strength of the US dollar.

As we edge towards the US Presidential election, both parties’ approach to managing the economy is the number one issue for voters¹. This is particularly true for swing states like Arizona, Georgia, Michigan, Pennsylvania, and Wisconsin.

In times of economic downturn, Democrats have often opted for deficit spending to revive the economy while Republicans have been more likely to favour policies that benefit business and commercial interests.

While Vice President Kamala Harris may be up in the polls², the more vocal Presidential candidate, Donald Trump, could potentially appeal to Americans with his plan to ease economic pressure by artificially devaluing the US dollar. In a July 16 interview with Bloomberg Businessweek, he said that, during his former Presidency, he debated the issue with Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe.

The US dollar’s strength is still on his mind, with Trump saying the US has a “big currency problem… in terms of strong dollar/weak yen, weak yuan³.”

It’s an unexpected proposal, given that most developed countries’ currencies have their value determined by the strength of that nation’s economic outlook, reflected in the level of interest rates. The US dollar’s status as the world’s reserve currency also bolsters its value.
Much of the US dollar’s strength is out of Trump’s hands, however, there are three levers available to him if elected President.

1. Direct influence over the Federal Reserve

Generally, Presidents don’t attempt to influence the US Federal Reserve (Fed). The board’s independence is one of the hallmarks of the US economy. Which is why the idea of the White House having more interaction with the US Federal Reserve is a topic of speculation and discussion in the markets.

In an unprecedented attack on the Fed’s independence, Trump told reporters the president should “have at least (a) say,” on the Fed’s decisions, claiming that his business experience meant he had better instincts on the economy than many of the board members⁴. During his first term as President, Trump didn’t hold back in criticising Federal Reserve Chair Jerome Powell in the midst of the coronavirus, calling the Fed “pathetic” and “slow-moving” on cutting interest rates. He even went as far as investigating whether he could remove Powell before the end of Powell’s four-year term⁵.

In his most recent interview with Businessweek, Trump dialled back that kind of rhetoric, saying that he would let Powell serve out his current term – ending in January 2028. But it was hardly an endorsement⁶.

Powell has worn Trump’s criticism in his first term and has shown he can handle the heat, but the President appoints the Chair of the Fed, meaning that come 2028, if Trump is President, he may opt for someone more willing to bend interest rates to his will.

2. Tactical measures creating downside for other nations

In the first term of his 2016 Presidency, Donald Trump levied tariffs on a wide range of Chinese imports, believing that to “Make America Great Again” he must give US manufacturing the best possible competitive edge. In the current presidential race, he has floated plans for a 10% tariff on most imports and a tariff of 60% or more on Chinese goods⁷.

Ordinarily, implementing tariffs drives prices up by making cheaper imported goods more expensive, which in turn leads to higher inflation, higher interest rates, and a higher dollar.

But Trump believes he can use the threat of tariffs to force other nations to make concessions with their currencies.
“Man, is it good for negotiation. I’ve had countries that were potentially extremely hostile coming to me and say, ‘Sir, please stop with the tariffs. Stop.’ They would do anything,” he told Businessweek.

He said the threat of tariffs was effective against Japan and China and can point to some success with this tactic. During Trump’s time in office, the dollar declined 5.5% against the yuan.

3. Scale up oil mining and lift ban on gas exports

A climate-change sceptic, Trump sees the energy transition as one of the biggest inflationary threats and said he wants to tap the ‘liquid gold’ under Americans’ feet.

If elected, Trump has promised to open more oilfields in the Gulf of Mexico and lift the moratorium on drilling in the Alaskan Arctic. He has also said he would lift the ban on gas exports — although that would send gas offshore, which might not help domestic prices.
While energy prices might have an outsized impact on consumers’ mindsets, they are generally not that inflationary.
A recent Federal Reserve paper found that energy was a significant contributor to inflation in 2022, but since then, it’s had zero effect. In real terms, household electricity and natural gas costs have been steady since 1996⁸.

While it is true that gasoline prices were much lower under Trump, that can be attributed to COVID lockdowns. By contrast, Russia’s invasion of Ukraine sent prices the other way under Biden⁹.

At the end of the day, energy prices are a function of economic demand, and even with extra drilling, it would take significantly higher output to cancel out price rises.

Are Trump’s other policies consistent with a lower dollar?

One of Trump’s signature proposals is to go ahead with another round of tax cuts after he slashed the corporate tax rate from 35% to 21% and the top tax rate for high earners¹⁰.

All told, tax cuts and spending packages pushed US debt up $8.4 trillion under Trump. Spending under Biden added another $4.3 trillion. Trump’s tax breaks are due to expire in 2025, but if extended, would increase debt by another $4.6 trillion over the next decade¹¹, growing a debt burden that has surged from 55% of GDP under Clinton, to 123% of GDP today¹².

Such significant debt could move the US dollar in 2 ways.

Can Trump’s policies influence the value of the US dollar?

Trump can point to a decline in the US dollar against the yuan as evidence he can get the job done, but there are many other factors at play. Analysts view Trump’s policies to be more likely to inflate the value of the dollar rather and reducing it. Tax cuts, more government spending, and tariffs on imports are all likely to add to inflation, and subsequently interest rates.

What could this mean for currencies?

At the end of the day, the US dollar rises and falls on the strength of its economy, relative to its peers, and by what’s happening in global money markets. Last week’s surprise fluctuations in the USDJPY carry trade is a good case in point.

The big equity market sell-off last week was partly caused by an unwinding of the famous carry trade — investors borrowing money cheaply in Japan to buy stocks elsewhere. That trade is now over, following interest rate rises in Japan. Big market fluctuations like that are outside of a US President’s sphere of influence.

To end on a more positive note, markets seem to have calmed after the events of “Black Monday”¹³. In fact, some currencies benefited.

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