The dollar has devalued since Trump became President
Lifted from comments by PGL:
The dollar has devalued since Trump became President:
Barry Eichengreen has some interesting thoughts here:
“One of the big ones in the circles I frequent is dollar weakness. Between January 2017 and January 2018, the broad effective exchange rate of the dollar fell by 8%, wrong-footing many of the pundits. I include myself among the wrong-footed (others can decide whether I qualify as a pundit). Tax cuts and interest-rate normalization, I expected, would shift the mix toward looser fiscal and tighter monetary policies, the combination that drove up the dollar in the Reagan-Volcker years. Tax changes encouraging US corporations to repatriate their profits would unleash a wave of capital inflows, pushing up the dollar still further. New tariffs that made imports more costly and that shifted demand toward domestic goods would require offsetting effects in a near-full-employment economy in order to shift demand back to foreign sources. The most plausible such offset was, of course, appreciation of the real exchange rate, which could occur only through inflation or, more plausibly, a stronger dollar. The markets, in their wisdom, rejected this logic for more than a year.”
With this market rejection, he revisits:
“The most popular explanation for dollar weakness is that Trump, through incompetence or misdirection, failed to deliver what he promised. There was no across-the-board import tariff. There was no abrogation of the North American Free Trade Agreement. There was no $1 trillion infrastructure package. But there were, in fact, deep tax cuts. There were, in fact, interest-rate hikes by the Federal Reserve. And there were, in fact, tax changes creating incentives for the repatriation of profits. Other things equal, these developments should have propped up the dollar. So there must be more to its weakening than just Trump’s failure to deliver. Another popular explanation is that investors expected the real exchange rate to rise through inflation rather than currency appreciation. The dollar weakened, in this view, because the Fed fell behind the curve and risked losing control of the inflation process.”
There is much more to this thoughtful post!
Tax reform does not necessarily lead to dollar purchases.
Under tax accounting rules the assets may actually be deposited abroad
but that is not necessarily so. The US firm may claim that the assets is being held abroad for tax reasons, but in reality they do not have to be held abroad.
For all practical purposes the asset may be deposited in a US bank money market fund located in the US and if the firm decides to use it to make a domestic investment, it just shifts the assets from one US domestic fund or bank account to another without anything happening in the dollar market. So dollar repatriation may be much smaller than many think.
Appears to have gone downhill since Clinton.
The point is that we generally expect large budget deficits to lead to dollar appreciation and thus larger trade deficits due to rising interest rates. During the Reagan years this happened and was known as the “double deficit” problem.
We have somewhat rising interest rates now, although not dramatically so, but indeed compared to our main trading partners. We should be seeing dollar appreciation, but are not. This should be helping lower our trade deficit, a goal of Trump’s, so he should like this unexpected dollar depreciation, but even more mysteriously it has not done so so far.