Issue of the week: President Trump’s dollar dilemma
Well, now we know what keeps President Trump awake at night, said Taylor Tepper in Money.com. According to The Huffington Post, the president recently placed a 3 a.m. phone call to his then– national security adviser Mike Flynn and asked whether a strong dollar or a weak dollar was better for the U.S. economy. “Flynn reportedly demurred,” suggesting Trump call an economist instead. But it’s a legitimate question, especially with the greenback hovering at a 14-year high. The simplest explanation is that a strong dollar makes foreign goods like German-made cars and shirts from China cheaper to buy for U.S. consumers. But a strong dollar hurts American manufacturers, whose exports become more expensive for overseas customers. “To answer the president’s question, then, it all depends on who you are.”
This debate has long consumed economists, said Chelsey Dulaney in The Wall Street Journal. The main benefit of a strong dollar is that it reflects confidence in the U.S. economy. “But if the dollar gets too strong, it can unleash a slew of negative consequences for both the U.S. and economies around the world.” A surging greenback makes commodities like oil, which is priced in dollars, more expensive. Developing countries also hold more than $315 billion in dollardenominated debt, which “becomes more expensive to pay back when the dollar rises.” And because we live in a global economy, a foreign nation’s debt woes can quickly cause economic pain in the U.S.
The president now has to make a choice, said Matthew Yglesias in Vox.com. Just last month he declared that the strong dollar is “killing us” by making U.S. manufacturers less competitive. And “the high price of the dollar over the past three years is a key reason why American manufacturing employment has flatlined.” Any move by the Trump administration that reduces the dollar’s value would likely provide a short-term boost to the manufacturing sector. But it would also cut the purchasing power of all Americans, most of whom don’t work in factories or live in factory towns. So, that’s the trade-off. “If you want to improve living standards for most Americans, a strong dollar is better. But if you want to deliver on your campaign promises to the Midwest, you probably want a weaker one.”
Trump might want to devalue the dollar, but his policies could make the currency even stronger, said Neil Irwin in The New York Times. Fears that Trump will tear up the North American Free Trade Agreement have already caused the Canadian and Mexican currencies to drop in value against the dollar. The GOP’s proposed border adjustment tax—which taxes imports but makes revenues from exports deductible—could further increase the dollar’s value by as much 20 percent. And if the administration’s plan to cut taxes while boosting infrastructure spending comes to fruition, the Federal Reserve would likely increase interest rates. Global investors seeking greater returns would then shift their assets to the U.S. If that happens, the dollar will keep on climbing, no matter what else the president does.