Trump’s US dollar indifference triggers a slide in the greenback

MCH market insights

Recent comments from President Trump about the US dollar have prompted some hand-wringing in some quarters about the US administration’s commitment to what has been the US’s so-called “strong dollar” policy.

This policy has helped to reinforce the idea that a strong US dollar symbolises confidence in the US economy, as well as confidence in its governance and business environment, along with the greenback’s pre-eminent position as the global reserve currency.

This unique position also helps in keeping US borrowing costs down.

While all of this is true it’s only a policy that is implied, it’s not actually written down anywhere and works on the basis that no politician or central banker for that matter sets a target for the exchange rate.

The reality is a too strong US dollar can cause as many problems as a too weak dollar, and Trump’s comments in appearing relaxed about the recent weakness of the greenback could make it much more difficult for the Fed to cut interest rates in the medium term, by making inflation stickier than it should be.  

The reality is that concerns about US dollar hegemony are nothing new, we had them during the financial crisis and we had them on various occasions during Trump’s first presidency.

It was only 4 years ago that a surge in the US dollar was causing concern as the Fed indicated it was prepared to start hiking rates aggressively to get inflation back under control, sending the US dollar index to a 20 year high in the process.

US dollar index since 1999

Source: Bloomberg

Fast forward three and a half years and now some people are getting their knickers in a knot because the euro has pushed up to its highest levels since 2021, with 1.2350 the next key levels, and against the Japanese yen has retreated from the 45-year highs we saw in the middle of 2024.  

We’re also well shy of the lows we saw during the Covid lockdowns and the middle of 2021.

While Trump’s indifference to the recent decline is at odds with many of his predecessors, that in itself shouldn’t be a surprise to many people.

Trump is a disruptor, and while he is President, he is likely to remain so, and what we’ve seen in recent years with respect to the moves higher in gold and silver prices, along with the surge in interest in crypto currencies has meant that investors have become wise to that.

Gold at over $5,000 an ounce, and silver north of $100 shows that diversification out of the US dollar is gathering pace, as is the record highs being seen in UK and European stock markets as more investors go underweight the US.  

Does that mean we should be concerned about further US dollar weakness? I would say in all probability yes, but we remain well short of what I would call a US dollar rout. You also have to ask yourself where are the viable alternatives?

There are many reasons to criticise Trump, and I have and I will, but when I look at the political classes elsewhere are they any more competent? 

Spoiler Alert, they aren’t, if anything they are even more incompetent, they simply aren’t as loud, or obvious about it.

When you look at the likes of the euro, there are still huge challenges in making the single currency a viable or even credible alternative given the inherent unaddressed structural issues still unresolved, like Banking union, as well as a single unified fiscal authority.  

The Chinese yuan isn’t a viable alternative either given that it isn’t freely floated and as for the pound, don’t make me laugh.

For years people have been writing the obituary of the US dollar and for years it has managed to bounce back albeit at lower levels than it has on previous occasions.

The fact remains the US dollar remains the currency of last resort even now given the lack of credible alternatives, and looking at the performance of the US dollar index over the last 25 years it still remains well above the record lows we saw in the wake of the 2007/2008 financial crisis. It is also still above the lows we saw in 2017 and 2021.

That isn’t an endorsement of what Trump is saying, it isn’t, it’s just a fact. The US dollar is to all intents and purposes the best of a sorry bunch.