In the Age of Trump, the Dollar No Longer Seems a Sure Thing
By Peter S. Goodman, NY Times, Aug. 9, 2017
LONDON--It is the closest thing to a certainty in the global economy. When trouble flares and anxiety mounts, people who manage money traditionally entrust it to a seemingly indomitable refuge, the American dollar.
Yet on Wednesday, in the hours after President’s Trump’s threat to unleash “fire and fury” on North Korea if it continued to menace the United States, global investors sold the dollar. The same dynamic played out in June, as Saudi Arabia and other Arab nations imposed an embargo on Qatar, delivering a fraught crisis to the oil-rich Persian Gulf. And the dollar dipped in July after President Vladimir V. Putin of Russia expelled 755 American diplomats, ratcheting up tensions between the two nuclear powers.
Since the beginning of the year, the dollar has surrendered nearly 8 percent against a basket of major currencies.
The dollar remains the dominant instrument for global trade, a role it is unlikely to surrender anytime soon. Yet those who trade in currencies see tentative signs that the dollar may be losing some status as markets grapple with the unorthodox actions of the man leading the nation printing the money.
Donald J. Trump’s presidency has been so full of departures from the norms of international relations that uncertainty has seeped into the calculation of America’s plans. That has subjected the dollar to additional skepticism, enhancing the fundamental factors pulling it down, from worries about the strength of the American economy to improved fortunes in Europe and Asia.
The dollar has in some sense become an international medium of expression about the American political environment. Its value offers a gauge of sentiment for Mr. Trump’s prospects in achieving his economic goals, as well as worries about his potentially impulsive declarations.
“At the margin, investors may be a little more cautious in treating the dollar as safe haven,” said Jeremy Cook, chief economist at World First, a London-based company that handles foreign exchange transactions. “Certainly, the sentiment toward the viability of the Trump administration has not helped. There’s the risk that at 3 a.m., Trump tweets something and the dollar gets hit.”
Currency values are both volatile and relative. The dollar’s worth must be understood as a reflection of contrasting economic prospects in the United States and other lands.
Mr. Trump’s pro-growth initiatives have been sidelined just as the Federal Reserve has lifted interest rates, constraining American expansion. At the same time, Europe--long a morose topic in the global economic conversation--has shown encouraging signs of vigor.
Spain has seen its economy return to pre-crisis size. France elected a new president, Emmanuel Macron, who has engendered hopes he will deliver growth. Even Greece, still saddled with gargantuan debts, has lately flashed signs of improvement.
Given these shifts in fortune, investors have been inclined to sell dollar holdings while shifting the proceeds into euros. Since January, the dollar has lost more than 11 percent against the euro.
“Foreign exchange markets were persistently discounting Europe’s strength,” said Adam S. Posen, a former official at the Bank of England, and now president of the Peterson Institute for International Economics in Washington. “They are playing catch-up.”
For American exporters, a weaker dollar effectively makes goods cheaper on world markets. Not coincidentally, multinational companies based in the United States have seen their earnings soar.
A weaker dollar also makes vacations in the United States cheaper, attracting more international tourists and bolstering employment in the hospitality industries.
But given that the United States imports more than it exports, a cheaper dollar effectively increases prices on wares for American consumers, from clothing to electronics to tools.
A weaker dollar may be pleasing to Mr. Trump. He has previously called for a cheaper greenback to make it easier for American companies to sell goods abroad. He has railed against countries that have large trade surpluses with the United States, such as China and Germany, while accusing them of profiting from undervalued currencies.
Currencies tend to be nudged by scores of factors that play out at once, rendering speculative any conversation about daily price movements. Evidence is mixed on whether the dollar is less of a safe haven. While the value of the American currency has dropped, so has another traditional refuge, the Swiss franc. This may indicate that geopolitical events have simply not reached a point at which investors are seeking shelter.
“Risk factors are playing out as opposed to ‘head for the hills’ kind of panic,” said Lutfey Siddiqi, a visiting professor at the London School of Economics. “What has certainly happened is that the outlook for the United States is dramatically less clear than it was at the start of the year.”
The fate of the dollar is now subject to the influences of a presidential administration that has given markets an expectation for the unexpected. As traders seek to divine the risks of geopolitical hot spots, this appears to be weighing on the American currency.
“There is some erosion in the relative stability of the United States in light of this administration’s inconsistency on global affairs,” said Mr. Posen of the Peterson Institute. “The U.S. is at relatively more risk than we thought in the past.”
