Weaken the USD to Make America Great Again

About a month ago (see The bear case: How Trumponomics keeps me awake at night), I highlighted a Bloomberg interview with BAML currency strategist David Woo. Woo pointed that there is an inherent contradiction in a couple of Trump's policies. His fiscal policy of tax cuts is pro-growth and therefore USD bullish, but his "America first" trade policy needs a weaker dollar. So what does he really want, a strong dollar, or a weak dollar?

We may have an answer. In a recent WSJ interview, Trump said that the dollar is “too strong”, especially considering the China’s yuan is “dropping like a rock.” While those remarks were made in the context of Sino-American trade relations, Trump signaled that, if he had to choose, he would prioritize a weaker currency over fiscal stimulus.

Trump`s priorities of trade policy over fiscal policy is consistent with his criticism of the House Republican border tax adjustment plan as “too complicated“ (via WSJ). Already, the spectacle of passing a fiscal budget, even with Republican control of the White House, the Senate, and the House, is turning into a public “sausage making“ exercise.

A strategy of USD weakness makes more sense for Trump if he wants to achieve his trade policy objectives. As Larry Summers pointed out, Trump's populist message of attacking trading partners like Mexico has the unintended effect of depressing the Mexican Peso. A lower MXNUSD exchange rate paradoxically incentivizes companies to move production south of the Rio Grande (via AP and Business Insider):

Summers told a panel at the World Economic Forum on Wednesday that the president-elect's "rhetoric and announced policies" over Mexico have led to a big fall in the value of the Mexican peso against the dollar.

That, he said, is a "dagger at Ohio," as it will make it even more attractive for firms to move to Mexico.

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