Trump’s trade wars – bad for the dollar?

President Donald Trump clearly thinks trade wars will be good for the US, since (from his vantage point) the US is losing out. Ergo, any trade war can hardly be worse. But if his intention was to boost the US dollar, then he may not get what he bargained for.

We have been here before, of course. Back when Bill Clinton was just a novice president, the US treasury secretary initiated a policy of weakening the US dollar, in order to help reduce the US trade deficit with Japan. This helps to boost US exports at the expense of imports into the USA. President Trump’s more direct method looks to result in a withdrawal of capital from the US, as investors begin to fret about a hit to economic growth. Those mid-1990s tariffs, and those introduced by George W Bush in 2002, caused a 15% decline in the value of the US dollar.

While the dollar is usually a ‘safe haven’ play, with investors moving back to the greenback and Treasuries in times of economic concern, trade wars and the ballooning current account deficit combine to make US assets unattractive. Already, markets are characterised by a move out of US assets (except for stocks), pushing up currencies like the euro, sterling, and the yen. Trade wars could accelerate this move.

As trade wars intensify, economic growth is expected to decline. While the steel and aluminium industries account for around 2% of overall imports, their products are used across the US. As prices rise, economic growth is likely to slow, and the Federal Reserve (Fed) may well be forced to increase its pace of tightening.

But this may not provide much relief for the US dollar. Markets are no longer focusing on growth, since that has broadly returned around the globe. Instead, they will look to political concerns regarding instability in Washington, and worries that fiscal uncertainty will result in higher inflation.

These policies look like a reaction to the currents of globalisation that have swept the globe since the fall of the Berlin Wall. The domestic US steel industry has been hard hit, with wages continuing to stagnate and jobs being cut. But those who voted for President Trump in the hope that protectionist policies will help in the long term should not be too optimistic. The 1930’s witnessed a return to protectionism, and the world economy suffered. The same could happen here, and if a downturn does materialise, a weaker US dollar will only help so much to mitigate the impact.