Despite some recent “strength” the US dollar seems mired in a long-term decline.
What can rescue it?
As we explained earlier, there’s a logical connection between tax rates and the dollar. As you raise taxes, you increase the need to hold onto dollars, because only taxes allow you to extinguish your annual (or quarterly, or daily) tax bill.
Conversely, the ongoing decline in taxes over the years has meant that the wealthy are now, more than ever, free to put more of their wealth in Swiss Franc, gold, Brazilian Real, etc. So in theory, if you hiked their taxes, the dollar would strengthen.
And it’s not just a theory.
This chart shows the ratio of the government’s tax revenue vs. expenditures. When it’s up, tax collections are higher as a percentage of expenses. When it’s down, it’s the opposite. As you can see, the blue line (the tax ratio) leads the red line (the trade-weighted dollar).
So voila: Want a higher dollar, raise taxes and increased the demand for dollars.
[credit provider=”St. Louis Fed”]