President Trump had it all envisioned. A copy-paste “Plaza Accord” that would enshrine him and the Mar-a-Lago Accord in the history books, securing the hegemony of the US dollar. But for now, it remains something Trump can only dream about.
If Trump’s only goal was to weaken the dollar, he’s gotten his wish. Since the official start of his second term on January 20, the trade-weighted US dollar has dropped by 7 percent. In 1985, the dollar fell by a similar percentage, but that’s where the comparison ends.
There is absolutely no sign of a coordinated effort to weaken the dollar while simultaneously reaffirming its hegemony and status as the world’s reserve currency. Quite the opposite.
The dollar’s decline is disorderly, entirely driven by Trump’s statements and the reactions of other countries. The correlation between escalating or non-escalating actions and the dollar exchange rate is virtually 1. Gold prices—especially on days of escalation but really throughout the entire period—have risen by full percentage points, further underscoring this chaos-driven correlation.
Hegemony premium
What I don’t quite understand is that Trump aggressively targets the dollar’s hegemony, yet expects other countries to politely and in coordination allow their currencies to appreciate in order to confirm the supposedly glorious Mar-a-Lago Accord.
As the world’s reserve currency, you’re almost always (too) expensive. The same goes for the premium on US tech companies, which—with little resistance from, say, Europe—have managed to dominate the entire market. It also applies to Louis Vuitton handbags, real estate in Amsterdam, London, and New York, and, of course, to the US dollar.
In fact, the dollar and US Treasury bonds enjoy an added advantage due to financial regulations that heavily favor them. Questionable as that may be, having American assets on your balance sheet means you’re always in good standing with the regulators.
So if you threaten countries with severe “penalties” just for even thinking about moving away from the dollar, and you do everything in your power to maintain its dominance, then you shouldn’t complain that its value remains (too) high—especially since the so-called Western world and its policymakers appear utterly clueless about what’s coming.
If you read or listen to opinion pieces by traditional policymakers, central bankers, economists, and “experts,” the recurring theme is that everything will simply return to how it’s always been. They still believe that about interest rates too, even though rates have been falling for forty years.
Debacle
Trump’s inconsistent policies are now creating plenty of drama. Stock prices have dropped significantly, along with the dollar, while US interest rates have risen due to renewed inflation risk. But now the ripple effects are becoming visible around the globe.
The Taiwanese dollar appreciated by 3 percent against the US dollar on May 2—the strongest single-day gain in forty years—and Hong Kong is now being forced to sell massive amounts of the Hong Kong dollar to maintain its peg to the dollar.
Since the end of April, currency market volatility has risen by 25 percent, and central banks are clueless on how to respond to the rate storm. Ironically, the default response is often to cut rates—just to be safe—even though inflation remains too high. That confirms to me that we are in a mix of fiscal dominance and financial repression, where central banks’ original goal—protecting against inflation—has taken a backseat.
Either way, if Trump’s Mar-a-Lago brainchild was meant to pressure countries into agreeing to a coordinated decline of the dollar and a rebalancing of global trade—without escalating geopolitical tensions or other forms of collateral damage—then I have to rate Trump’s first hundred days a little less spectacular than he might himself believe.
Jeroen Blokland analyzes striking, timely charts on financial markets and macroeconomics in his newsletter, The Market Routine. He also manages the Blokland Smart Multi-Asset Fund, which invests in stocks, gold, and bitcoin.