For the longest time, I’ve been insisting that the strength of the dollar was an equalizer in a deleveraging world.
That is, dollar strength in a world where U.S. leverage growth was relatively low, would invariably lead to lower U.S. economic growth. Foreign savings, arriving with the strength of the dollar, would need to be absorbed in the U.S. at the same time U.S. leverage was not growing fast enough.
That, in turn, would have caused U.S. economic growth to be lower, and not just because of the harm a strong dollar causes exports. The growth rate in the U.S. domestic economy―consumption and investment―would also have to be lower to absorb the foreign savings attracted by a strong dollar.
However, with the impending arrival of the Trump presidency, that may no longer be a valid argument. If the U.S. federal deficit continues to widen―as the Trump team’s economic policies voiced during the campaign would seem to indicate it will―those foreign savings can be absorbed by federal borrowing and the U.S. economic growth rate can be higher even with the strength of the dollar.
So, in all likelihood, at least for a while, dollar strength is something we should get used to.
Strong dollar may pose political challenges
However, the persistence of dollar strength has the potential to pose serious longer-term political challenges for the Trump Administration. Dollar strength and the ensuing dollar flows into the U.S. are just the flip side of the U.S. trade deficit widening meaningfully. That is, the strength of the dollar will not hurt U.S. growth; but for a strong dollar and good growth environment to persist, the U.S. trade deficit has to widen. In other words, the U.S. will be exporting a significant amount of its fiscal stimulus-induced growth to other parts of the world.
In and of itself, that is not typically a big challenge for a new administration. Several administrations―especially the George W. Bush Administration―had no problem dealing with the issue. But for a Trump Administration that won on an anti-trade and therefore an anti-trade-deficit-widening agenda, a growing trade deficit may not sit so well.
If U.S. economic growth as a result of the stimulus remains consistent and persistent, we will have no issues. But at the first sign of growth faltering, the hollers of protest from the same constituencies that voted Trump in will get louder and the rhetoric of trade wars and currency controls will only get hotter.
It may not be imminent but it is something to be aware of.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.