Dollar is “too strong”
US President Donald Trump is of the opinion that the dollar (UUP) “is getting too strong.” He expressed his opinion while in conversation with The Wall Street Journal.
He went on to express that “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting—that will hurt ultimately.” He was also quoted as saying, “Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good.”
The greenback had risen after the Presidential election in November due to his views on a boost to infrastructure spending and tax cuts. However, since then it has come down, leading to emerging market currencies doing quite well.
What can Trump’s statement mean for currencies?
Theoretically, his statement could mean further strengthening of emerging market currencies. This would be good for those countries and firms who have a lot of debt denominated in the greenback. A weaker dollar would make these debts cheaper to service.
However, pushing the dollar down would be easier said than done. The US economy has been becoming stronger, which will reflect on the US dollar. Further, the dollar is also expected to rise in a rising interest rate environment in the US.
Though the expected slow pace of rate hikes in the US may not be enough to make the dollar stronger, what can have this effect is the divergence in the monetary policies between the US vis-à-vis Europe and Japan, whose currencies are chief components of the dollar index. Expansionary monetary policies being followed by these nations, as compared to contractionary policy being followed by the US Federal Reserve, can push the dollar higher.
Further, a weaker domestic unit works in the favor of these and other nations whose economies are struggling to grow. A weaker currency makes their exports more competitive in the international market, thus assisting improved export numbers.
Next, let’s take a look at the popularity of emerging market bonds.