Here's why the dollar could defy Trump and keep marching higher

President Donald Trump told The Wall Street Journal that the US dollar is too strong.

Larry Fink, head of BlackRock, the world’s largest asset manager, seemed to concur with Trump when he told an audience in Washington DC on Wednesday night that the strong dollar is one reason for slow economic growth, Bloomberg reported.

But the direction of the US economy and monetary policy all point to a strengthening dollar and limit how much Trump can talk down the greenback, said Alan Ruskin, the head of G10 FX strategy at Deutsche Bank.

“Jawboning only has a sustained reaction if it is pushing on an open door, i.e. in the current example, if fundamentals were already pointing toward USD weakness, which they are not,” Ruskin said in a note on Wednesday.

The best thing about a strong dollar is that it sounds good, Trump said in the interview published on Wednesday. It also makes international travel and shopping cheaper for Americans.

However, it makes US exports less competitive since countries can opt for goods that are denominated in cheaper currencies. And that’s Trump’s main issue with the strong dollar.

The US dollar index, which measures it against a basket of other currencies, slid after Trump’s remarks. Ruskin said any dollar weakness because of Trump’s comments is likely to be temporary. And if good economic data continue to push the Federal Reserve to raise interest rates, that only helps the dollar, he added.

Trump’s own economic agenda could work against his call for the dollar’s strength to moderate.

If the economy gets a dose of fiscal stimulus and improves like he promised, that won’t drive investors away from the dollar.

Ruskin added that if the US implements its proposed border adjustment tax — which Trump said Wednesday he would rather call a reciprocal or matching or mirror tax — a stronger dollar would be needed to offset the resulting inflationary pressures.

There’s also a political limitation to how much Trump can talk up the dollar. In the WSJ interview, Trump said he would no longer label China a currency manipulator. But if the US wishes to continue to comment on the foreign exchange practices of other G20 countries, Trump’s verbal intervention would undermine those efforts, Ruskin said.

“That said, in the US Treasury’s criteria of currency manipulation, jawboning does not count,” said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman, in a note. “Still, it seems a departure from the G7 and G20 agreements, and like areas, this is an example of unilateralism.”

At best, Trump could encourage some investors to reduce their long-dollar positions — buying that’s based on a bet the dollar would rally. Dollar bulls unwound some of their bets as the post-election bump to the greenback faded in 2017, according to Bank of America Merrill Lynch.

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