Donald Trump’s dollar devaluation plan unlikely to prevail, say investors
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Donald Trump’s plan to devalue the dollar if he wins the US election looks “extremely unlikely” to succeed as it would be undermined by policies such as tariffs and tax cuts, according to investors.
In recent weeks, the former president and his running mate, JD Vance, have talked up the benefits of weakening the currency to boost the country’s manufacturing and lower the trade deficit.
But strategists warn that plans to devalue the dollar would be expensive and shortlived, while populist policies such as tariffs on overseas goods would counter its effect.
“There is a big contradiction in the market today — Trump has been vocal about dollar depreciation but his policies should support the currency, at least in the short term,” said Michaël Nizard, a fund manager at Edmond de Rothschild.
In an interview with Bloomberg last week,
Trump could put pressure on the Federal Reserve to lower rates, even if an erosion of Fed independence is not an official policy of his campaign. However that would likely alarm markets.
George Saravelos, head of FX research at Deutsche Bank, calculated that the dollar would have to drop by as much as 40 per cent to close the US trade deficit.
“The cost of the disruption is so massive . . . the market here will be a powerful countervailing force,” said Edward Al-Hussainy, global rates strategist at Columbia Threadneedle adding that any intervention to weaken the dollar was “extremely unlikely”.
One proposal for weakening the currency has been for the US to use the Treasury’s Exchange Stabilisation Fund. However the fund has around $200bn in assets to buy foreign currencies, which analysts fear would soon be exhausted.
“This is far, far harder to put in place than they might think,” said Englander. “Japan did a very very small intervention a month ago and it cost them $70bn, and how effective was that?”
And Trump and Vance may yet run into problems with their own voters. “The most obvious way for this devaluation to happen is for the US to lose its economic exceptionalism,” said Jalinoos.
But the dollar remains the world’s reserve currency and a haven in times of economic turmoil. One of the Republican Party’s 2024 pledges is to “keep the US dollar as the world’s reserve currency.”
