The election of President Donald J. Trump
The dollar appreciated sharply in the weeks following the election of President Donald J. Trump. By the time of Trump’s inauguration, the dollar had reached levels not seen for more than 10 years. The strong dollar seemingly posed a threat to Trump’s campaign promise to reduce and even eliminate America’s trade deficit.
In pursuit of this goal, the incoming Trump administration threatened to renegotiate existing trade agreements and to label the Chinese government a “currency manipulator.” By April of 2017, Trump was giving public voice to his views on the dollar, stating in an interview to the Wall Street Journal that he thought that the “dollar is getting too strong” (Baker et al. 2017). Trump’s statement, and his continued support for low interest rates, contributed to a weakening of the dollar over subsequent months. By the end of the year, the dollar had fallen by about 10 percent relative to its December 2016 value but remained almost 15 percent above the post-crisis floor that it reached in 2014.
Should the Trump administration strive to weaken the dollar further in pursuit of reducing the trade deficit? Critics of such a policy highlight the costs and potential dangers associated with a weaker dollar. Some analysts argue that market expectations of prolonged dollar weakness could lead to higher interest rates in the United States. Higher interest rates would raise the cost of investment for the private sector and raise the federal government’s borrowing costs.
Others suggest that a determined policy of undervaluing the dollar will eventually spark foreign retaliation, thereby raising the possibility of another “currency war” like the one Brazil accused American policy of triggering in 2009-2011. More profoundly, a loss of foreign confidence in the commitment by American policymakers to a strong dollar could cause foreign governments to shift from the dollar to the euro as their primary vehicle currency and reserve asset. Such a shift would precipitate a major collapse of the dollar and substantially raise borrowing costs in the United States. For advocates of this position, a strong dollar is a critical American interest. What is the right value for the dollar?
Policy Options – please pick one and answer the questions below
– Pursue policies to strengthen the dollar against foreign currencies.
– Pursue policies to keep the dollar relatively undervalued in order to promote exports.
1. Which option do you prefer? Justify your choice.
2. What criticisms of your position should you anticipate? how would you defend your recommendation against these criticisms?
