Will the Dollar Be Trumped?
SANTA BARBARA – Since Donald Trump was elected President of the United States, capital inflows have pushed up the dollar’s value to levels not seen in more than a decade. At first blush, it might seem that markets are registering a massive vote of confidence in the president-elect, believing that his policies will be good for the US economy and, by extension, for the dollar.
But appearances can be deceiving. Short-term exchange-rate movements are no way to judge a currency’s underlying strength. Longer-term trends in how money is used internationally – particularly as a store of value for foreign investors or central banks – are far more telling. In the context of the coming years, rather than just the next few weeks, Trump’s election will almost certainly be bad for the greenback.
For starters, the dollar has shot up since the election only because Trump has promised to enact deep tax cuts and ramp up spending on decaying infrastructure and America’s supposedly “depleted” military. This will boost near-term economic growth and inevitably push interest rates up. In a world hungry for attractive investment returns, a prospective Trump boom has drawn funds to Wall Street, in turn increasing demand for the dollar.