While President Trump has always claimed to want a lower dollar, consensus among investors was that his policies would strengthen him. It turns out that he was right, but perhaps the worst way.
On Thursday, the actions fell in the United States, Europe and Asia after the unveiling by Trump of a series of punishing “Liberation Day” rates. What was more unexpected is that the US dollar dropped against most large currencies. The WSJ Dollar index, an indicator based on a basket of currencies, has now lost more than 5.9% this year and is less than its place on November 5 before its post-electoral rally.
This makes Wall Street analysts quite bad: most said to investors, even until the prices were announced on Wednesday, that protectionist policies would increase the currency. The idea was that less purchases of foreign goods would reduce the trade deficit and mechanically reduce the American demand for currencies. In addition, American growth exceeds the euro zone, which has always been positive in dollars.
Instead, speculators have changed strongly against the greenback, according to data on derivatives of the derivatives of the Futures Trading Commission.
Sudden relaxation cannot really concern prices increasing the risk of recession. The dollar is generally strengthening during busts as well as booms because investors are looking for refuge – creating the famous “dollar smile”.
Why was the market wrong? Maybe the greenback is at adjusted levels as expensive for inflation that it was ready to fall. Or, as some investors support, the economic assault of the United States against the Allies erodes the status of “global reserve” of the dollar.
The latter would be a victory for the administration. In 2024, Trump’s chief economic advisor Stephen Miran stressed the need to tackle the trade deficit by penalizing foreign central banks and treasurers for parking lots in the United States.
However, empirical support is missing, as superior foreign purchases abroad tend to coincide with a lower dollar. The world’s dollar reserves have been flat since 2018 because the dollar has increased by 16%, according to figures from the International Monetary Fund.
A better answer, which is less flattering for Trump, is that faith in the long-term economic potential of the United States is discolving.
Currency traders can be short -term hunters of renowned differentials. Over the five -year periods, however, the difference in return on investment between American and European shares has shown a correlation of 70% with the measures in dollars of the Euro since 2001.
This suggests that a good part of the force in dollars is due to investments which follow the relative growth of economic productivity – very motivated by the Silicon Valley Rking in enormous benefits and transforming the United States into a massive exporter of technological goods and, in particular, services.
The markets could now anticipate another structural change. A rearmament push fueling the hopes of an economic renewal in Europe, as well as the history of American growth is marred by Chinese protectionism and challengers of artificial intelligence.
Of course, the rise of China itself stresses that the case of free trade is defective and that the US government should probably also try to promote key industries. Delocation to reduce costs has often harmed workers, created fragile supply chains and made companies less eager to innovate. Industrial giants in difficulty such as Intel and Boeing can testify.
The problem is that Trump’s prices were sudden and erratic. The list of reciprocal rates on Wednesday on each trading partner is an example, because they are not based on a calculation that has economic meaning. Such policies are probably working on businesses rather than inducing companies to move production through a targeted and progressive approach. More than the miracles of the development of Asia, these policies resemble the imperfect experiences of Latin America with the “import substitution”.
Yes, there could be advantages for General Motors and Ford which relavented the assembly jobs of Mexico. But do the same with all automotive parts – including low -value components such as textiles and cable beams – would make American industry very ineffective. This comes at the top of probable reprisals by other countries and 100% prices on Chinese electric vehicles inherited from the Biden era.
American manufacturers excel in truck and SUV segments, where American consumers are particularly demanding. But they find it difficult to produce cars of less than $ 25,000, even before prices. Tesla is also a luxury brand.
If the American market becomes isolated, foreign companies such as Toyota and Hyundai, which dominate budgetary models, can innovate less in their American factories than abroad.
This is what happened in Brazil and Argentina, because their attempts to build a local automotive industry protected external competition businesses between the 1950s and 1980s. And this contrasts with the way in which South Korea and China created world -class manufacturers by combining protectionism with the discipline of foreign markets.
Focusing too much on trade deficits neglects that the competitiveness and profitability of American exchangeable products played a key role in determining the value of the dollar. At present, they are questioned.
Write to Jon Sindreu to Jon.Sindreu@wsj.com
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