Trump's policy plans and dollar hopes a paradox

January 19, 2017 09:48 AM

U.S. president-elect Donald Trump failed to see the connection between his policy plans and the strength of the dollar when he expressed his favor of a weaker currency earlier this week, a former policy adviser of the International Monetary Fund said.

The incoming president will probably roll out tariffs within the first year of his administration, Barry Eichengreen, who now teaches at the University of California, Berkeley, told the Reuters Global Markets Forum.

The following are edited excerpts from the conversation:

Q: Trump said earlier this week he thinks the dollar is too strong and "it's killing us". Why is he trying to talk down the dollar?

A: Trump sees clearly that the strong dollar is an obstacle to his goal of growing manufacturing employment in the U.S. and boosting U.S. exports. He just doesn't see the connection between his own policy proposals, and those of the Congress, with the strength of the dollar.

Trump wants a mix of loose fiscal and tight monetary policies, which will push up the dollar, and then he is frustrated by the strength of the dollar. He wants tariffs on imports, which push up the dollar, but then he is frustrated by the currency's strength. A paradox, no?

Q: The likelihood of Trump declaring a trade war against China is rising. Does he want to start a currency war against China as well?

A: I think Trump is anxious to do something visible in terms of policy, especially toward China, at the outset of his administration. Labeling China a currency manipulator, followed by imposing some kind of trade sanction, is the one thing a new president can do unilaterally.

Q: Trump campaigned on the idea of renegotiating trade deals with China. Which deals would he try to change?

A: I'm not sure what trade deals he's talking about either. Trump has the authority to impose tariffs on imports from China under a number of acts, starting with the 1917 Trading with the Enemy Act. He would presumably be hoping to get improved access to the Chinese market for specific U.S. firms.

Q: Can you describe what a trade war might look like and what signs the global markets should be on alert for?

A: Watch Twitter. China is exercising admirable restraint, but at some point its pride will be offended and it will be provoked. And I interpret treasury selling by China as an attempt to moderate the depreciation of the yuan, not as a political statement.

Q: What are your expectations from the Trump administration in the first six months to one year?

A: Approval ratings are already low. I expect moves on tariffs, since that's the one thing the president can do on his own. I expect changes in corporate taxation, since here, Trump and the Congress agree.

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