The Dollar Has Not Yet Spoken

A gaining Dollar may not infact, be an indication of an optimistic leadership.

The US dollar index has been on the gain since Mr Donald Trump’s election victory in November, 2016. Its index during the election period was at 101.63, a 6% rise as of 23rd November, 2016.  The strength of the dollar has been attributed to Trump’s proposals for fiscal policy initiatives. There are however, some voids being left by his policies, ideas and further agendas. There is looming fear that Trump’s policies be only near-sighted, especially on the fiscal side.

Be it Trump’s anti-trade policies, lose fiscal policy ideas, or foreign income repatriation that may be forthcoming, there is a chance of the dollar only gaining against other strong currencies. Particularly, the anti-trade policies hold the high probability of a raging trade war amongst the emerging markets. The only glitch that the economy may see would be the reduction in labour supply, though temporary, owing to the anti-immigration policy that can reach a new dimension soon.  Another area that reeks of precipitation is the fiscal policy. Though there are forecasts that Trump’s fiscal policies point towards a stronger US dollar, fiscal expansion may negatively impact the dollar, should markets worry about increasing debt services. A stronger dollar may not actually be a positive indicator for US multinational companies. The US firms attribute weaker profits to the stronger dollar, and the sequence of events may resist the present efforts for protectionism policies. For instance, boosting US homemade goods through trade restrictions such as tariffs risks a “self-defeating chain reaction”. In this view, US-made goods (would) fetch less on the global market due to higher pricing while imports get cheaper. The overall consequence is ruining home-grown manufacturers, depressing the economy. It may be safe to say that Trump’s administration has emerged in a period when the dollar is so powerful that the US’s trade competitiveness may weaken and hence, adversely affect the domestic producers. Seemingly, manufacturing job positions are offshored to relatively lower-wage jurisdictions. The leftover-jobs are challenged by wage pressures resulting from automation as a mechanism to cut costs by corporations.

Trump’s governance is facing a foreign exchange market with fear lingering in front of it. It is now believed that the trend in the dollar’s rise might force the Republican administration to resolve to “time-honoured” strategy to talk down the world’s powerful reserve currency. Mr Trump seems sceptical as well about a firmer US dollar. He also accused China of weakening the renminbi, an attempt to tilt the advantage towards the dollar.

In light of the current economic climate, all the factors cited behind the dollar’s strength are relatively prevenient. It is too hard to forecast the dollar’s performance based on the three-week administration of the new GOP. Trump’s trade protectionism, warlike foreign policy, the Federal Reserve’s strategy against inflation rise, and the Republican-controlled Congress voting via infrastructure initiatives and tax cuts, all add up to a destructive economy, but a stronger dollar, atleast for now. Particularly at a time when more than half the world is trying to liberalize its markets, protectionism cannot be a defence mechanism for developed economies. A better solution would perhaps be increase domestic savings, thereby keeping imports suppressed and exports limited. There may be multiple ways to achieve this, one indirect way being introduction of social insurance policies which would induce forced savings by households. Infact, it becomes necessary to recognize the thin line between currency manipulation and protectionism now. Strategies like import tariffs and export subsidies are blatant examples of the former may be rather futile compared to the market forces taking over.

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