Trump seems to have a back-up plan if his trade wars fail

President
Donald Trump at a Carrier factory in Indiana
Mike Segar/Reuters

• Government officials have argued for a strong dollar
  for decades.
• President Donald Trump has gone against that precedent
  repeatedly.
• Some analysts think he could use exchange rates instead
  of tariffs to push US trade competitiveness. 

For decades in the US, government officials on both sides of the
aisle have generally made a point to back a strong dollar in
public — especially those in the Oval Office. 

President Donald Trump, on the other hand, has said
the dollar is “getting too strong” and repeatedly lashed out
at other countries for using monetary accommodation
to weaken their currencies. 

Twice this past week, he
criticized the Federal Reserve, which is meant to be
independent from political influence, for raising interest rates.
(Higher interest rates are attractive to foreign investors, so
they generally lead to a stronger currency.) 

The Fed has raised interest rates five times since Trump took
office, with two of those hikes coming under the leadership of
Jerome Powell — his Fed chairman pick. It is expected to hike
rates two more times this year, according to Bloomberg’s World
Interest Rate Probability data.

“As we have seen in recent weeks, the President has ramped up
verbal jawboning over a strong dollar and higher US rates as the
currency has strengthened,” ING strategists Viraj Patel and Chris
Turner wrote in a note this week, adding that the strength of the
greenback appears to be “at the upper bound of the White House’s
tolerance level.” The dollar has jumped more than 8% since
April, right around when the Trump administration announced plans
to hit other countries with tariffs.

ING

Trump is far from the first politician to favor lower interest
rates. Easy money is politically popular for a number of reasons.
But for a president in a trade war months before midterms,
analysts say it appears to be increasingly about defending trade
competitiveness.

If the administration shifted from tariffs to the use of
exchange rates, Nomura chief economist Richard Koo pointed out
that it would essentially allow simultaneous price adjustments
for “all imported products.” A weaker dollar can stimulate
exports because it makes US products cheaper abroad. 

That could be an attractive means of boosting exports, analysts
say, as a trade war triggers political backlash in key
constituencies for the president and his party. Tariffs have
raised prices for American companies and lowered access to
foreign markets, potentially setting the stage for dampened
economic growth. 

A trade war can also present logistical issues, especially for an
administration plagued by disorganization and legal chaos. A
recent Associated
Press analysis found the Trump White House has had
record turnover. 

“A protectionist policy that must be individually tailored to
each product category requires large numbers of administrative
staff, and a period must be established during which companies
can apply for exemptions,” Koo said. “Exchange rate-based
adjustments, on the other hand, entail no such costs.

“In that sense, the more problematic administrative delays become
and the more industry opposition mounts, the greater the
likelihood that President Trump will replace tariffs with
exchange rates as his main tool for addressing US trade
imbalances.”