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Donald Trump’s plan to devalue the dollar if he wins the US election looks “extremely unlikely” to succeed as it would be undermined by policies such as tariffs and tax cuts, according to investors.
In recent weeks, the former president and his running mate, JD Vance, have talked up the benefits of weakening the currency to boost the country’s manufacturing and lower the trade deficit.
But strategists warn that plans to devalue the dollar would be expensive and shortlived, while populist policies such as tariffs on overseas goods would counter its effect.
“There is a big contradiction in the market today — Trump has been vocal about dollar depreciation but his policies should support the currency, at least in the short term,” said Michaël Nizard, a fund manager at Edmond de Rothschild.
In an interview with Bloomberg last week, Trump said the US had a “big currency problem” that placed a “tremendous burden” on manufacturers selling goods overseas.
Vance’s vision for America, laid out in his speech at the Republican National Convention last week, also centres on a weaker dollar — rebuilding US manufacturing onshore and undoing some of the globalisation of the past decades.
Trump’s calls for a weaker currency come as the dollar, despite a recent dip, has risen by 15 per cent against a basket of currencies since President Joe Biden took office in January 2021. The US trade deficit is a third larger than in 2019 and reached $773bn last year. It is also because the US economy is strong and interest rates are at their highest levels in 23 years.
Shahab Jalinoos, head of G10 FX strategy at UBS, said there was no obvious avenue for a president to take to devalue the currency. “The fundamental problem is that there isn’t a sense that the US dollar is overvalued,” he said.
A big hurdle Trump and Vance face in their bid to weaken the currency is that their other policies could support the dollar. Trump has said he wants to impose a 60 per cent tariff on Chinese imports and 10 per cent duties on those from the rest of the world if he returns to the White House.
Strategists say this places a larger burden on currencies outside of the US, where cross-border trade is larger relative to the size of the economy.
That suggests that high tariffs would inflict more damage on non-US economies, curbing their growth and weakening their currencies. Last week European Central Bank president Christine Lagarde was clear that tariffs would be likely to push the ECB towards cutting rates and a weaker euro.
Tariffs could also raise domestic costs, pushing inflation higher and keeping interest rates elevated. While the impact is hard to predict, Steve Englander, global head of G10 FX research at Standard Chartered, estimated Trump’s tariff proposal could raise prices by 1.8 per cent over two years, absent second-round effects.
“Tariffs, all else being equal, will result in a stronger dollar, particularly if retaliation from trading partners in the form of tariffs raises additional growth risks for the global economy,” said James Lord, global head of FX at Morgan Stanley.
Trump has also said he would extend tax cuts that are due to expire next year and has hinted at further tax cuts which could add pressure to the US’s yawning budget deficit and slow the pace of the Fed’s cutting cycle.
But strategists also warn that Trump’s other options to devalue the dollar are limited by the upheaval that would be felt on global markets.
A dollar devaluation has not been attempted since the Plaza Accord in 1985, which had some success but was supported by a decline in US interest rates.
Trump could put pressure on the Federal Reserve to lower rates, even if an erosion of Fed independence is not an official policy of his campaign. However that would likely alarm markets.
George Saravelos, head of FX research at Deutsche Bank, calculated that the dollar would have to drop by as much as 40 per cent to close the US trade deficit.
“The cost of the disruption is so massive . . . the market here will be a powerful countervailing force,” said Edward Al-Hussainy, global rates strategist at Columbia Threadneedle adding that any intervention to weaken the dollar was “extremely unlikely”.
One proposal for weakening the currency has been for the US to use the Treasury’s Exchange Stabilisation Fund. However the fund has around $200bn in assets to buy foreign currencies, which analysts fear would soon be exhausted.
“This is far, far harder to put in place than they might think,” said Englander. “Japan did a very very small intervention a month ago and it cost them $70bn, and how effective was that?”
And Trump and Vance may yet run into problems with their own voters. “The most obvious way for this devaluation to happen is for the US to lose its economic exceptionalism,” said Jalinoos.
But the dollar remains the world’s reserve currency and a haven in times of economic turmoil. One of the Republican Party’s 2024 pledges is to “keep the US dollar as the world’s reserve currency.”
