U.S. President Donald Trump’s comments in Davos, Switzerland gave support to a U.S. dollar that has been in decline over the last two years, saying to CNBC, “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.”
Those comments seemed to contradict previous comments from Treasury Secretary Steve Mnuchin who said that a “weaker dollar is good for trade.” Trump said those comments were misinterpreted. The comments by Trump and Mnuchin continue a relatively long tradition of U.S. administrations that have officially maintained a strong dollar policy but have privately hoped for a relatively weak currency. A weak currency tends to boost production in the country of that currency, while a stronger currency lends support for consumers as well as tourists looking to travel overseas.
Despite short-term movements driven by comments from policymakers, the U.S. dollar has been trading lower on broader fundamentals as well as powerful cyclical forces. The U.S. dollar index is now back to late-2014 levels, but it continues to higher than it was during the period following the financial crisis, when it stayed in a relatively narrow range between 2009 and 2014.
The U.S. economy recovered earlier than many other developed economies around the world, including Europe. The Federal Reserve was also willing to engage in aggressive monetary policy earlier than the European Central Bank. That has meant that interest rates in Europe remain lower than the United States, with further to rise in the future as economic growth has returned and central bank normalization is expected.
Emerging market economies are also getting a boost as growth returns to areas including Brazil and economies such as Russia, whose economy is closely linked to commodity prices.
Perhaps more than anything, the dollar is beginning to reflect increased concerns of the fiscal health of the U.S. government. This year’s deficit should come in at 3.5% of GDP and has risen each year since hitting a low of 2.4% of GDP in 2014. While the Trump administration hopes that tax reform will boost the economy enough to offset lower tax rates, some remain skeptical that will be the case.
All things considered, while the U.S. dollar remains a safe haven for global investors, right now forces are likely to continue pushing it modestly lower.