Share on TwitterShare on FacebookShare on LinkedInShare via WhatsappShare via Email
A strong dollar, among other things, sets the stage for a new confrontation between Trump and China. The in-depth analysis of the weekly The Economist
The dollar appears increasingly fearsome. As U.S. growth remained strong and investors scaled back bets that the Federal Reserve would cut interest rates, money poured into the country’s markets and the greenback rose. It has risen 4% against a basket of trade-weighted currencies this year, and fundamentals point to further appreciation. With the presidential election upon us and with Democrats and Republicans determined to boost American manufacturing, the world stands on the brink of a difficult new period of strong dollar geopolitics.
The situation is made even more difficult by the fact that the currency’s strength reflects the weakness of other areas. At the end of 2023, the U.S. economy will be 8% larger than at the end of 2019. Over the same period, those of Britain, France, Germany and Japan each grew by less than 2%. The yen is at a 34-year low against the dollar. The euro fell to $1.07 from $1.10 at the start of the year. Some traders are betting that the pair will reach parity early next year. Should Donald Trump win in November, the stage is therefore set for a battle. A strong dollar tends to increase the price of American exports and decrease that of imports, which would increase the country’s persistent trade deficit, which has been Trump’s workhorse for decades. Robert Lighthizer, the architect of tariffs against China during Trump’s time in the White House, wants to weaken the dollar, according to the news website Politico. President Joe Biden has made no public statements on the currency, but a strong dollar complicates his production agenda.
Elsewhere, a strong dollar is positive for exporters who have costs denominated in other currencies. But high US interest rates and a strong dollar generate imported inflation, which is now exacerbated by relatively high oil prices. Additionally, companies that took out dollar loans face higher repayments. On April 18, Kristalina Georgieva, head of the IMF, warned about the impact of these developments on global financial stability. Many countries have large foreign currency reserves that they could sell to strengthen their currencies: Japan has $1.3 trillion, India $643 billion and South Korea $419 billion. However, any relief would be temporary. While the selling slowed the dollar’s strengthening in 2022, as the Fed began raising interest rates, they didn’t stop it. Central banks and finance ministries are reluctant to waste their resources on fruitless struggles.
Another option is international coordination to halt the greenback’s climb. The beginning of this process was shown on April 16, when the finance ministers of America, Japan and South Korea expressed concern about the collapse of the yen and won. This could be the precursor to more intervention – in the form of joint sales of foreign exchange reserves – to prevent the two Asian currencies from weakening further. But as much as these countries want to be on the same page, the economy is inevitably driving them apart. After all, the weakness of the yen and won is driven by the interest rate gap between America and other countries. South Korea’s two-year government bonds offer a yield of around 3.5%, Japan’s just 0.3%, while US Treasuries of the same maturity offer 5%. If interest rates in America remain sharply higher, investors seeking yield will face a simple choice and their decisions will support the dollar.
Then there are countries with which America is less likely to cooperate. China saw about $39 billion in foreign currency outflows in March as investors fled the country’s languishing economy, according to Goldman Sachs bank, the fourth-highest month since 2016. The yuan has weakened steadily against the dollar since the beginning of the year, and more rapidly since mid-March, when the dollar rose from 7.18 to 7.25 yuan. Bank of America expects it to reach 7.45 by September, when the US election campaign is in full swing. Doing so would see the yuan weaken to its lowest level since 2007, giving a boost to the Chinese government’s latest export initiative. Low-cost Chinese electric vehicles could become even cheaper, infuriating American politicians.
American protectionists may also be willing to ignore allies’ weak currencies, at least for a time. They are less likely to do so for China. This carries the risk of further tariffs and sanctions, and perhaps even China’s return to America’s list of currency manipulators. As long as the US economy is performing well, the dollar is likely to remain strong. And as long as American politicians see this as a cause for concern, trade tensions will increase.
(Excerpt from the foreign press review by Epr Comunicazione)
