Many pundits are pontificating as to what a Trump presidency would mean for the U.S. economy, foreign policy, and politics in general. One thing is for sure, it would not be business as usual. The whole notion of the Trump campaign is that he will upset many an apple cart once in the White House. That is his appeal to his supporters. But one question I have not heard answered is what would a Trump presidency do to the U.S. dollar? I’m going to give this one my best shot. So, here goes.
The trade issue immediately comes to mind. Trump has stated he is for free trade but not unfair trade. He has a point here. Chinese markets are not open. American companies beg for free access to Chinese markets but are manipulated for technology transfers and building plants in-country, while American doors are wide open. Obviously many American workers have been hurt by this unfair system. Yes, there will be an economic shock to the system as Trump tries to rectify the situation to make the playing field more level. This could reduce economic growth in the short-term as markets digest any new trade policies, but long-term, it seems this might help the American lower and middle class and give them more buying power which is always good for consumer spending and the like. Talk of tariffs is always dangerous and there is a possibility this effort could go off the deep end like what happened in the 1930s. However I think his position on this issue and strong rhetoric is merely an opening negotiating position for Trump. He’s not that stupid, or so I hope, as to drive world trade off a cliff. The short-term impact could be a weaker dollar as the Fed waits on the sidelines and traders forgo the thought of higher rates anytime soon.
Contrast the trade agenda with Trump’s take on the budget, the deficit, and the overwhelming sovereign debt of the United States, which is approaching $20 trillion, a number unfathomable to many. It’s literally a number so big that people can’t get their arms around it and understand it, so they ignore it, hoping it will just get better on its own. Trump vows to not ignore it and get the debt and the deficit under control, as a businessman taking over a malfunctioning corporation would. I predict this will be a boon to economic growth in America. So here, you will have upward pressure on the dollar as the Fed looks to rein in inflation and possibly raise rates.
Most investors know that markets move on anticipation, on expectations of what will happen, not necessarily the actual event. Hence the old ‘buy on the rumor, sell on the news’ maxim. I am of the opinion that as we get closer to the reality that Trump or another Republican candidate will change government involvement across the U.S. economy, you will see a massive, corporate sigh of relief and this will be a net positive for equity markets. With other major economies weakening around the world, a revitalized American economy will also put a floor under the dollar from a demand and psychological standpoint, the old cleanest shirt in a dirty pile effect.
Yes, there will be downward pressure on the dollar short-term as traders see Fed hikes coming down the pike quicker and more often with stronger economic growth. However, this will be a fleeting phenomenon. Once the economy turns to an exponentially higher growth path, as with after Reagan’s initial attack on inflation which drove the US into a recession, I think the dollar will rebound strongly and drive higher.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com