Strong Dollar or Weak DollarSubmitted by Headwater Investment Consulting on August 14th, 2019
By Kevin Chambers
The White House has declared China is a “currency manipulator.” Although this declaration is mostly a symbolic gesture or a tactic in the ongoing trade war, it brings up some interesting implications surrounding the relative value of currencies.
So why does the Trump administration care so much about exchange rates? It all boils down to their trade policy focus to support domestic over international producers. It’s true that a strong dollar gives American’s more power to spend money abroad. When the dollar is relatively worth more than other currencies, items in other countries seem cheaper. However, a strong dollar also encourages Americans and US companies to import more of their goods versus using American-made products, making a strong US Dollar counter to Trump’s campaign platform. The strong dollar makes international companies and individuals less likely to buy American products, thus hurting US exports. The Trump administration wants to encourage American industry and increase American exports, decreasing imports. Therefore, they have been one of the few administrations to push for a weaker dollar.
It is important to note that the relative strength of the dollar is not tied to the relative strength of the US economy. Many additional factors contribute to a strong economy than just the strength of the country’s currency. As far as currency valuation goes, the dollar is valued relative to all other currencies in the world, so the more relevant factor is how the US Dollar compares with our largest trade partners. The Chinese currency fell after Trumps’ announcement of the next wave of tariffs against Chinese goods. Likely the Trump administration is primarily concerned that China is artificially keeping their currency at a low value. The fall in the Yuan versus the dollar will increase the value of the US imports to China and, more importantly, the help offset some the price increases Chinese companies would face in the US. Thus, the currency manipulation can somewhat offset the higher prices American consumers would see from the tariffs.
As economists at heart, this whole story is a little troubling. Free-floating currencies and lower tariffs allow goods to flow more freely and encourage fair prices. The actions of both parties in this battle are increasing prices for business and consumers. The possible political and long-term strategies of China and the current White House are outweighing the potential downsides.
Photo by Kredite.org on Unsplash