Trump’s trade wars – bad for the dollar?

The apparent outbreak of trade wars between the US and the EU suggests we will see further declines in an already weak US dollar. 

USD
Source: Bloomberg

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.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.