It’s pointless to rehash whether Donald Trump should be taken seriously or literally. Particularly when it comes to the former and future president’s economic policies.
Rather, Trump’s words are best understood through a prism of the broader story about the markets and the broader U.S. economy. The Republican may toss out contradictory policy proposals, seemingly at random. But when an issue, and his specific prescription, is truly salient for the Republican 45th and soon-to-be 47th president, it usually comes in the form of a threat.
So, while the protectionist faction of Trump’s entourage has spent the better part of a year trying to spin a narrative that Trump wants to devalue the dollar, every action he has taken since his Nov. 5 win indicates the opposite. True to the Republican Party platform he dictated, Trump’s economic machinations and declarations have bolstered the United States dollar and put our fairweather friends across the globe on notice. Trump may be merely bluffing when he threatens tariff after tariff, but that may be the entire point — and investors are ecstatic.
Trump’s first tariff ultimatum was a means to a diplomatic end, not an economic one. Trump threatened to impose a 25% tariff on Mexico and Canada should our neighbors fail to stymie the record of flows of illegal aliens and drugs into our borders. Trump knows the countries cannot refuse his demand. A full 80% of exports from both Canada and Mexico go to the U.S., with our consumers contributing 20% of Canada’s gross domestic product and some 30% of Mexico’s.
But regardless of Trump’s stated intentions, the greenback is up more than 2% against both the peso and Canadian dollar. And why? Because Trump’s tough talk elicited the desired results.
While Mexican President Claudia Sheinbaum tried to correct Trump’s claim that she called after his tariff threat with the promise that her government would close the border, authorities there have indeed begun to crack down on migrant caravans heading through the country to the U.S. And Canadian Prime Minister Justin Trudeau acquiesced to Trump’s demands in even more flagrant fashion, jetting out to bend the knee at Mar-a-Lago and publicly pledging to escalate border security “in a visible and muscular way.”
Trump’s second tariff threat was a promise that his administration, once in office, would slap a 100% tariff on Brazil, China, India, Russia, and South Africa if the aforementioned BRICS countries created a shared rival currency to rival the greenback. This was less an immediately actionable ultimatum than a message to the world. The BRICS bloc has nowhere near the consensus or the capital to create a coherent currency to compete with the U.S. dollar, and even in four years, it’s not likely that they’ll come anywhere close.
But that wasn’t the point. Rather, Trump was signaling that he’s serious about bolstering the greenback’s strength and enshrining its status as the world’s reserve currency after four years of a White House that seemed utterly disinterested with countries like China and Saudi Arabia considering abandoning the U.S. dollar as the default medium of exchange for international oil sales.
Trump is right to care: the greenback’s share of global foreign exchange reserves has fallen from 71% to just 58% since the start of the 21st century. The Chinese renminbi has tripled from 1% to 3% since the International Monetary Fund began measuring that currency, also known as the yuan, in 2016. In absolute terms, Beijing’s share may still be small, but Trump is putting central bankers, heads of state, and investors on notice that he won’t let the dollar lose dominance without a fight.
The greenback rose another 0.6% against a basket of global currencies in the immediate aftermath of Trump’s threat.
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Trump is correctly capitalizing on the global financial weakness that led to a welcome breakdown between the traditional relationship between the value of U.S. dollars and U.S. debt. While Treasury yields and the greenback have historically moved together, meaning both would go either up or down at the same time, the trajectories of the two measures have diverged somewhat in the last year. While the value of U.S. debt did slightly fall upon Trump’s victory, it’s recovered since, even as the dollar’s value continues to grow. This defies the conventional wisdom.
The widespread pessimism with the rest of the world’s financial prospects from even before the election has collided head-on with elation for Trump’s victory and renewed confidence for the U.S.’s future economic growth, international dominance, and ability to keep its deficit spending from careening out of control. Trump heads into the Oval Office with the mandate not just of the popular vote but also investors from the world over.
This article was originally published at www.washingtonexaminer.com
