Macro Digest : A Trump Tower accord or a direct weak Dollar policy?
There is an ever increasing risk that President Trump will pursue at weak Dollar policy outright – it makes sense for his “program” as more export is needed to grow and it matches heavily indebted emerging markets need for easier dollar to help with burden of rising capital cost of the interest (on mainly US dollar)
There is strong economic background similarities between now and 1985 when the Plaza accord was made:
“The United States experienced 3% GDP growth during 1983 and 1984 with a current account deficit approaching an estimated 3-3.5% of GDP, while European nations saw a negative GDP growth of -0.7% with huge trade surpluses. The same thing happened to Japan. Trade deficits in general require foreign financing. For the United States during the early to mid ’80s, Japan and West Germany were buying United States bonds, notes and bills from their surpluses to finance our current deficits at the expense of their own economies. It was only a matter of time before protectionist policies entered this equation that would not only hurt United States growth at home but force trade wars that would derail the entire system of trade for all nations. (To learn more, check out What Is GDP And Why Is It So Important?)
During this period, inflation was the lowest it has been in 20 years for all nations, and European nations and Japan were investing in their own economies to promote growth. With low inflation and low interest rates, the repayment of debt would be accomplished quite easily. The only aspect missing from these equations was an adjustment in exchange rates rather than an overhaul of the present system.
I remain of the view that we get weaker US dollar policy dictated in one of three ways:
- The indirect – Talking up other currencies – recently China but today also Germany: https://www.ft.com/content/e33022f6-1b33-3539-9f38-d47cfafd2b43
- The direct version 1.0 – A new Plaza Accord – or more likely Trump Tower Accord (hat-tip @mikeharrisNY) – the G8 is forced to negotiations table by incoming US administration who clearly holds no prisoners in policy application
- The direct version 2.0 – most favorite – A de facto weak US Dollar policy done similar to what Nixon and his Treasury Secretary John Connally announced on the G7 meeting in Rome 1971: “The US dollar is our currency but your problem”
I am convinced President Trump is using Nixon’s template as President for his own – including tough talking, media unfriendly, nationalistic agenda’s plus they both felt they were given mandate for change : Nixon to take US out of Vietnam, while Trump to cater for the “lost Americans”
Furthermore my more medium indicator – the weekly Dollar Index also turned down…
Let me end by saying that my FX colleague John Hardy, of course, remains the main spokesperson on FX for Saxo Bank – my “calls” are more medium and long-term and ignores the consensus, the short-term technical picture and fits better with asset allocation models.
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