Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn’t have even considered this question. But under this new mercantilist US regime, who knows? We identify five ways in which Washington could try to engineer a weaker dollar
In this article
- Key messages: Time to consider how Trump could weaken the dollar
- White House needs a weak dollar for US trade policy consistency
- Dethroning the King: President Trump’s toolkit to weaken dollar
- US Treasury FX Intervention | Likelihood: Very Low | Impact: Limited
- Altering the Fed’s mandate | Likelihood: Very Low | Impact: High
- White House dollar jawboning | Likelihood: High | Impact: Negligible
- Pressure major trading partners to strengthen their currencies | Likelihood: High | Impact: Medium
- A US Sovereign Wealth Fund | Likelihood: Very Low | Impact: Medium
- Bottom line: Weak dollar policy will be self-fullfilling
- Footnotes
Key messages: Time to consider how Trump could weaken the dollar
- President Trump’s ramped up verbal jawboning in recent weeks suggests that current USD strength may be the upper bound of the White House’s tolerance level
- We identify five policies that the White House could employ to weaken the dollar: (1) US FX intervention and building out US FX reserves; (2) Changing the rules of the game for the Fed; (3) Ongoing jawboning and talking down the dollar; (4) Pressuring major trading partners to strengthen their currencies; (5) Creating a US sovereign wealth fund.
- We don’t think any small-scale unilateral intervention by US authorities will have a sustained impact on weakening the dollar. The best historical precedent – the Bush FX interventions in 1989-1990 – shows that this approach had a limited impact in driving the USD materially lower.
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