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We are on the brink of discovering whether Donald Trump’s stance on the dollar has evolved.
During his first term, the former president favored a weaker dollar. In a noteworthy instance in 2019, when European Central Bank president Mario Draghi hinted at further monetary stimulus, Trump took to Twitter to express his disapproval, claiming that Draghi’s remarks caused the Euro to drop against the Dollar, giving Europe an unfair advantage in competition with the USA.
Trump’s involvement in dollar policy, usually overseen by the Treasury secretary, led to immediate market reactions and revealed his preference for a weaker dollar.
Fast forward to the end of 2024, and indications suggest that Trump may have shifted his perspective. The Treasury nominee, Scott Bessent, hinted that Trump now supports free markets, stating that a strong dollar is a natural outcome of sound economic policies.
However, Trump’s unconventional approach and tendency to signal policy changes on social media leave room for speculation. It’s plausible that he could seek to weaken the dollar through negotiations with major trading partners in exchange for trade concessions, reminiscent of the Plaza Accord of 1985. The effectiveness of such a strategy remains uncertain, given the complexities of currency relations.
If Trump still favors a weaker dollar, recent developments have not aligned with his preferences. The DXY dollar index has risen by nearly 3% since the election, gaining ground against currencies that may be targeted by trade tariffs.
Forecasting currency movements involves analyzing various factors, including economic growth and interest rates. The current outlook favors a stronger dollar, as the US economy outpaces others and potential tariffs could dampen growth in other nations, prompting rate cuts.
Amidst rising US inflation and contrasting monetary policies, the dollar is poised to maintain its strength against the euro and other currencies. China’s economic challenges may further support the dollar’s ascent if trade tensions escalate.
The uncertainty surrounding Trump’s approach to currency policies could lead to currency wars, with market participants closely monitoring developments. Despite already pricing in some of Trump’s influence, the dollar’s value could face further fluctuations in the coming year.
As the situation unfolds, investors brace for potential currency diplomacy through social media channels.
katie.martin@ft.com