Greenback stoush

There seems to be a potential storm brewing in the US between President Donald Trump and Chair of the Federal Reserve Janet Yellen over the greenback.

Trump favours a weak dollar. His statement this week is that the US in the past acted “like a bunch of dummies” for having a strong dollar policy.

But Yellen’s stance would mean a strong dollar.  She has indicated that the Fed will raise interest rates a “few times a year” for the next couple of years — and this could see investors flocking to buy the dollar and hence strengthening it.

There are three main reasons why Trump would prefer a lower US dollar.

The first is to boost exports. With a weak dollar, American companies will be more competitive as the cost of exports drop. However, a weak dollar means imports and raw materials will cost more — and hence inflation would rise, forcing up the cost of living.

The second reason is to shrink America’s trade deficit with other nations as exports increase and imports decline. But this is falling for a mercantilist fallacy that imports are bad, which is plain wrong. American companies benefit from having cheaper imports which make them more competitive.

Finally, a weak dollar will reduce American sovereign debt. However, there is a risk that other countries to which America owes money may devalue their own currency in order to prevent the debt being discounted.

Trump also seems to have missed the impact of proposed tariffs: they could easily cause the dollar to rise.

No one is sure how having the US president, a member of the executive branch of government and the Fed, an independent body of the government having such diametrically opposing views will work out a solution.

Regardless, Yellen’s term will be ending early in 2018 and the next Chair of the Federal Reserve will be nominated by Trump. Presumably, that Chair will be someone who favours Trump’s policies.

Herman Toh is a Mannkal Scholar intern.