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In President Trump’s habitual complaints about the Federal Reserve, he blames the central bank for a U.S. dollar that’s too strong. On June 11, he tweeted that the euro and other currencies have been devalued against the dollar, putting the U.S. at a big disadvantage and blamed the Fed for interest rates being “way too high.”
But analysts at Capital Economics say that Trump’s own protectionist trade policies are partly responsible for the dollar’s strength.
If it was only the Fed’s actions that mattered, the dollar would be weakening right now, says Michael Pearce, senior U.S. economist at Capital Economics. “Investors are betting on interest rate cuts over the next few years and that should be pushing the dollar down,” he says. (Higher interest rates typically increase the value of the dollar.)
But that hasn’t happened. The dollar is up 2% vs. the euro which is down over 2% year to date as of Friday morning.
Trump sees a strong dollar hurting his economic policy goals. “I want a strong dollar but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said back in March.
If the U.S. dollar is less expensive relative to other currencies, foreigners can purchase more American products, which would further stimulate U.S. manufacturing, limit imports, and help reduce the trade deficit.
Trump has lambasted the Fed numerous times since he’s been in the White House for what he says is overly tight monetary policy. The Fed last raised rates in December to a target range of 2.25% to 2.5%. Trump said in an interview in March with Fox Business News that the economy would have grown over 4% instead of 3.1% if the Federal Reserve had not raised rates during 2018.
Protectionist policies
Trump’s own protectionist trade policies are to blame for the dollar’s recent rise, says Capital Economics.
Tariffs have led to a flight to safety, rising demand for safe assets like U.S. Treasuries – thus boosting the dollar. “President Donald Trump’s trade agenda...has prompted some of that flight to safety. The threat of protectionism, the increased tariffs on China [those are factors that are] playing into this,” says Capital Economics senior US economist Michael Pearce.