The value of the U.S. dollar: Where to next?
While in office, President Truman famously displayed the statement, “The Buck stops here” on his desk. At that time, he wasn’t talking about the U.S. dollar, but rather conveying that he accepted responsibility for how the nation was governed.
Some 60 years later, the newest U.S. president might have a slightly different version on his desk: “Has the Buck stopped?” A subtitle could read: ‘Or does the Buck’s bull run that started in June 2014 continue?’ 1
Investors are wondering what the newest administration’s economic policies might mean for the direction of the nation’s currency.
The value of the U.S. dollar rallied after the November election2 based on investors’ beliefs that the new administration’s policies of infrastructure investment, tax overhaul, and other stimulus plans would lead to growth and a stronger dollar. That bullish dollar move contrasted with statements from the president and other officials in the new year saying the dollar was too strong, at least in relation to some trading partners. Currency traders hesitated, uncertain about the confusion of statements that conflict with proposed policies that would seem to be bullish for the dollar.3
Key among those policies is the border-adjustment tax which could trigger a substantial rise in the dollar. Here’s why:
This tax involves a 20% tax added to imports and a 20% decrease of tax on exports. If enacted, the tax on imports would induce U.S. consumers to buy fewer imported goods. That would likely reduce the demand for foreign currency to pay for those goods thus probably causing those currencies to fall in value relative to the U.S. dollar.
Foreign consumers would likely experience the opposite effect: those consumers would want to buy more of the cheaper U.S. goods, paying for those goods in U.S. dollars. The decline in U.S. demand for foreign currency coupled with the increased demand for dollars from foreign consumers would cause the dollar’s value to rise about 25%.4
Of course, this border-adjustment tax hasn’t been enacted yet. The U.S. Congress must approve the proposed tax, and there are mixed opinions about the likelihood of that happening.5
Those U.S. firms that are large importers such as retailers feel their customers would suffer greatly while U.S. exporters would enjoy a substantial benefit from the subsidized prices. This situation is very likely to result in lots of lobbying from importers and exporters trying to argue the worthiness of their respective causes to Congress.
Congress must also consider that the border tax won’t happen in a vacuum. Other nations could respond with retaliatory import duties, effectively reducing or eliminating the benefit of the lower export cost and a boost to the dollar. Such a retaliation could cause global trade to decline possibly contributing to a worldwide slowdown that could lead to recession.6
Besides fiscal effects, dollar watchers also must contend with monetary developments. The Fed raised interest rates on March 15 and the dollar dropped 1%.7
A president’s economic policies with Congressional approval and assistance can have a substantial effect on the dollar’s course. It’s unclear whether the full extent of the current president’s policies can be implemented, and if so, whether they’ll have the intended effect. One thing for certain, however, is that the Buck won’t stop. It’s just unclear whether the next move is up or down.
For more on our thoughts about currency, please see our research here.
1 Source: https://www.bloomberg.com/quote/DXY:CUR
3 Source: “Dollar Caught Between President Trump’s Tough Talk, Policy Plans”, Wall Street Journal. February 1, 2017.
4 Source: “How America’s border-adjusted corporate tax would work.” The Economist. February 13, 2017.
5 Source: “Trump, GOP At Odds Over ‘Border Adjustment’ Tax.” NPR, Weekend Edition. February 11, 2017.
6 Source: “Why Trump’s ‘Big Border Tax’ Gets Taken Seriously: QuickTake Q&A.” Bloomberg.com. January 18, 2017.
7 Source: “Dollar drops against rivals after Fed raises rates, hints at 2 hikes in 2017.” Marketwatch.com. March 15, 2017.