Trump wants a weaker dollar. That will be easier said than done.
Summary
Markets are betting that a Trump presidency would mean a stronger dollar, even when those involved claim they want the opposite.
As much as Donald Trump says that he wants the U.S. dollar to weaken, Wall Street keeps betting that his presidency would deliver the opposite. The truth may end up lying somewhere in between.
The WSJ Dollar Index is up nearly 2% from a month ago. Most analysts see this as a reflection of the “Trump trade" that overtook financial markets in October—that is, bets that the Republican candidate will win the Nov. 5 election.
To be sure, the outcome remains too close to call. Market makers at top banks warn that most investors have avoided leaning one way or another. Part of the dollar’s rise is explained by strong economic data, which pushed up Treasury yields because of the expectation that the Federal Reserve won’t have to cut interest rates as quickly.
Also, the Trump trade is getting muddy: Investors are no longer using the playbook of pivoting toward “old economy" industries and smaller, domestically oriented firms, probably realizing that it yielded poor long-term results after 2016.
Nevertheless, most traders agree that those investors who are actively positioning themselves for a particular result tend to favor a Trump victory.
Shares in Trump Media and Technology Group, the meme stock attached to the social-media platform owned by the Republican candidate, have more than doubled in value over the past month, despite big falls Wednesday and Thursday. Also, calculations by the Fed suggest that the rise in Treasury yields isn’t fully explained by expected higher rates. Analysts believe budget deficits would be larger under Trump—particularly if Republicans sweep Congress—than Kamala Harris. This could mean the Treasury paying a bit more to borrow those funds.
But how can a stronger dollar be part of this Trump trade?
Both Trump and his vice-presidential nominee, JD Vance, have consistently blamed countries like China for ravaging U.S. manufacturing through an artificially weak currency. They have promised to devalue the exchange rate.
Investors think this would be difficult in practice. Trump’s plans to slash corporate taxes would likely drive even more overseas money into U.S. stocks, as was the case in 2018. Contrary to popular belief, budget deficits can end up benefiting the domestic currency, too, because they lead to faster growth and a more hawkish central bank.
Textbook economics suggests that imposing tariffs leads the domestic exchange rate to appreciate, since consumers aren’t sending as much currency abroad to acquire imported goods. Tariffs also harm the economies of export-focused nations more than the U.S., which makes investors prefer the dollar. Indeed, a paper published earlier this year by researchers at Johns Hopkins University found that the tariffs slapped on China by the first Trump presidency pushed up the greenback somewhat and had a stark negative effect on the yuan.
A stronger dollar in turn could undermine some of the impact of tariffs on the U.S. trade balance, making imports cheaper and U.S. exports less competitive.
Meanwhile, the Trump administration would have few tools to implement devaluation. The Treasury may talk down the dollar and label other countries “currency manipulators," but this has had limited impact in the past. It could use its Exchange Stabilization Fund to sell dollars, but it only held $211 billion in assets at the end of last year, a small sum compared with the vast international currency market.
If history is any guide, effective devaluation policies would require the Fed printing money with a specific exchange-rate target or range, which it can’t do under a longstanding accord with Group of Seven nations to let currencies float freely. One-off interventions would need to be coordinated with partners: Unilateral dollar sales such as the ones the U.S. did in 1989 have usually had a temporary effect, as opposed to the true regime changes delivered by the 1985 Plaza Accord or the foreign-exchange operations in 1994 and 1995, which were done by American, European and Japanese officials simultaneously.
Some on Wall Street believe that Trump could nominate a more closely aligned Fed chair who, at the very least, pursues a low-rate policy that indirectly cheapens the dollar—Jerome Powell, whom he appointed in 2018, finishes his term in May 2026. Still, true presidential influence over monetary policy would require changing the Federal Reserve Act, which seems unlikely to happen.
Nonetheless, investors still shouldn’t assume that a stronger dollar would automatically follow a Trump victory or the imposition of more tariffs. Between the 2016 and 2020 elections, it actually weakened. And this was coming from a lower point, especially relative to the yuan, which Chinese officials are now trying to prop up, and the Japanese yen. In inflation-adjusted terms, the dollar is currently trading at very expensive levels, reminiscent of the 1980s. It seems to have more room to fall than to rise.
Myriad factors determine exchange rates. The success or failure of China’s and Europe’s attempts to kick-start their own economic growth could ultimately matter more for the dollar than the U.S. election.
Write to Jon Sindreu at jon.sindreu@wsj.com
