The Tale of the Dollar

A Protectionism-inflicted Dollar may be in the news.

Several things are attributed to Trump’s victory; and several are ascribed as the outcomes of Trump’s victory. A rising USD has been attributed to the latter, by much analysis. The dollar rose against a major basket of currencies today. The index indicated strength at 100.54 – the highest since 2003.

Trump’s Presidency is foreseen to look at higher interest rates, and higher retails sales. An economy that would spend more, grow more, and experience favorable inflation, would be a dream come true for the US. When decision-makers have only the office as motivation, and when politics has a significant influence on exchange rates, a rational citizen would only witness exchange rate haywire. Elections affect exchange rates (and policy rates); pre-emptive actions do not do any good. Direct effect on exchange rates may be a concomitant effect; volatility may be an undesirable result. Even today, there are umpteen examples to cite, recording voters’ ignorance about the innermost incentives of policy-makers, or in fact competing candidates.

Exchange rate manipulation is an immemorial phenomenon in political history. Real exchange rates have known to be lowered by competing candidates to indicate their political competence, in order to gain preference of voters opinionated on atleast elementary international trade dynamics. This may be a rather miniscule segment of voters; a majority may be concerned about the socioeconomic portents of work that the candidate may bring in. This is where candidates find another reason to appeal to a middle ground of voters; a segment, which consists of fairly intellectual voters, and those who are bothered about welfare – the largest segment of voters.

The aspect to understand here is that exchange rates are affected by two sets of policies – international and domestic. Internationally, exchange rates interact with some major currencies in the basket, and other minor ones; and domestically, they determine prices, inflation, wages and other economic indicators and variables.  In this scenario, a protectionist environment in a financially open economy can only mean concerns about the currency in question. Restrictive policies that are anticipated, whether or not they materialise, might affect exchange rates.  The problem is that protectionist policies of one nation may offset the same from other nations. ‘Clarity’ in international trade policies has been one of the cornerstones of his campaigns. International trade, when defunct of labor migration, outsourcing and other assisting variables, becomes drains an open economy. Managing the trinity of real exchange rates, economic growth and competitiveness becomes an even difficult task when traditional protectionism is accorded to it. Economic growth is affected by distortions in the real exchange rate; but so does an overvalued exchange rate. With already high current account deficits, it may not be entirely erroneous to embark on a protectionist regime. Restoring competitiveness and reaching the target rate of inflation target may be key to an advanced economy like the US. Such fruition requires addressing the median segment of the population who belong to both the tradable and non-tradable sectors of the economy, in order to nonetheless be part of global trade and commerce.

Exchange rate may not be the only variable that would be affected. Anti-globalization policies may become a mainstay in the current political agenda, which makes emerging economies lose their share of growth. Greener pastures in the form of free trade deals amongst themselves may be an alternative that such economies seek. At the end of the day, protectionist policies will be just that – ‘Protectionist’, without much to garner.

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