Yesterday, US President Donald Trump spoke very unexpectedly in favor of a strong dollar. He said in a Fox interview: “It’s a good time to have a strong dollar. Everyone wants to be in the dollar because we kept it strong ”. This is precisely the attitude publicly supported by the US presidential administrations, at least since the 1990s. In 2017, Trump himself talked about the benefits of a weaker dollar. The Fed’s constant push for a softer policy is also weakly combined with a commitment to a stronger dollar. So why did the rhetoric change? There are two reasons for that.
First, it’s a tactic common to politicians: if you can’t beat them, suffer them. The turmoil in the financial markets in the first quarter of this year, among other things, generated high demand for the dollar. The capitals were on their way home, and the dollar plays like a safe haven. If you look at the dollar against the euro or the yen, you do not see any sharp shifts because these currencies are basically in the same weight category – currencies in rich economies with low interest rates. However, the Brazilian real, the Turkish lira and many other currencies have fallen significantly this year, highlighting the trend towards dollar growth.
Second, it’s time to compete for capital. Although the Fed buys assets in its balance sheet by unprecedented amounts, US government borrowing is even more unprecedented. The U.S. government plans to borrow more than $ 4.4 trillion by the end of the year and will clearly increase appetite in the next few years. In other words, the US president has to behave like a salesman in the eastern bazaar, praise his merchandise and note its value. After all, this “merchandise” could soon be greatly expanded. The secondary market must not have a parallel increase in supply; that is, the current owners of “merchandise” are not starting to get rid of it.
USA. Unlike 2009, Treasury now relies on the issuance of long-term government bonds to use a period of abnormally low interest rates and avoid the need to enter the market again and again to refinance debt. Interest rates on these long-term bonds are more volatile than short-term. Given the long-term horizons, investors demand more premium for long-term risks and also take into account exchange trends towards their biggest competitors. And here the dollar has something to brag about in recent years.
After recruiting Trump for his allies, the dollar may be able to maintain an upward trend throughout the period when the US Treasury needs money outside, ie. in the coming quarters.