(Bloomberg) — An independent Federal Reserve and a lack of cooperation from other countries could thwart potential efforts in a second Donald Trump administration to weaken the dollar, according to JPMorgan Chase & Co.
The topic of dollar strength is on top of mind for Trump and his running mate Ohio Senator JD Vance, who has also voiced his desire for a cheaper dollar, Michael Feroli, chief US economist at JPMorgan, wrote in a Thursday note. Commentators have pointed out that Trump’s wish to depreciate the dollar is at odds with his trade policy preferences, as theory predicts that the currency of a tariff-imposing country should appreciate following higher import duties.
That complication doesn’t necessarily mean that a Trump administration wouldn’t pursue policies to weaken the dollar, according to JPMorgan.
“The mainstream of the economics profession has considerable reservations about the effectiveness, or even harmlessness, of unilateral intervention aimed at weakening the dollar,” Feroli said. “Even so, that’s no reason to rule it out as an option the administration might consider.”
US presidents have independent tools, such as the US Treasury’s Exchange Stabilization Fund, that can be used to influence exchange rates distinct from the Federal Reserve or Congress. “There should be little doubt the president can use the resources of the ESF to try and weaken the dollar,” Feroli wrote. However, the situation of whether a Jerome Powell-led Fed might partner in depreciation attempts is “more ambiguous.”
A representative for the Trump campaign did not immediately respond to a request for comment.
JPMorgan evidence shows that sterilized intervention — in which the underlying monetary base of an economy doesn’t change as foreign assets are bought and sold — has had mixed results in the past. Efforts are more successful when the intervention is publicly announced and appears to have the backing of monetary authorities, and when the move is done in concert with other global central banks.
That would complicate efforts to depreciate the dollar against other major global currencies like the euro and yen, Feroli wrote. Intervention against currencies that are themselves arguably directed by their own governments, like Malaysia’s ringgit or Singapore’s dollar, are more likely to succeed.
In regards to China, moves to depreciate the greenback vis a vis the yuan are complicated by the fact the nation maintains an onshore and offshore currency regime.
“The elephant in the room is China,” Feroli wrote. “One obvious problem with this policy of countervailing currency intervention against China is that China maintains capital controls such that any potential intervention by the US would need to be undertaken in the offshore CNH market.”
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