Trump and Mnuchin hope for a weaker US dollar, but things are not that simple!

Foreign media pointed out that former President Trump has chosen J.D. Vance as his running mate, clearly indicating that if he returns to the White House in January next year, weakening the US dollar will be a key focus of his policy. Both of them are skeptical about the economic benefits brought by a strong US dollar, believing that a strong dollar hinders the revival of American manufacturing, which has become a core part of their political identity. However, some economic policy experts warn that deliberately suppressing the US dollar could bring huge risks, with the biggest risk possibly being the weakening of the US dollar's status as the world's reserve currency. Former Treasury official Mark Sobel pointed out that the US dollar as the de facto global currency has brought many benefits to the United States, helping to raise the standard of living for Americans by lowering the cost of imported goods, and strengthening Washington's ability to showcase US dominance on the global stage. Sobel said, "Essentially, the reason the dollar is the world's reserve currency is not because we declared it to be so, but because of our enormous economic size, having the world's most mature and liquid capital markets, and a relatively good history of macroeconomic policy." He added, " You can lower the value of the dollar by undermining these foundations, but that's like shooting yourself in the foot." Vance questions whether this situation is truly beneficial for the United States, arguing at a Senate hearing last year that the disadvantages of the US dollar as a reserve currency may outweigh its advantages. Although Trump has likened losing the world currency status of the dollar to "losing a war," and the Republican platform for 2024 calls for maintaining the dollar's reserve status, both Trump and Vance advocate for a devaluation of the dollar. Recently, after a sharp rise in the dollar against the yen, Trump raised this issue again in an interview. Reportedly, some of Trump's advisors are exploring ways to limit the independence of the Federal Reserve. Sobel pointed out that this would undermine a core principle supporting the dollar's reserve status. Another risk that a weak dollar may bring is a resurgence of inflation or hindered economic growth, both of which seem inconsistent with Trump's other policy goals. Former Chief Economist of the International Monetary Fund and Senior Researcher at the Peterson Institute for International Economics, Maurice Obstfeld, said in an interview, " If you want to suppress inflation but also want to devalue the dollar, these goals may be contradictory." There are other contradictions as well, such as raising tariffs on imported goods may also lead to a stronger dollar, and the same goes for tax reduction policies. Obstfeld pointed out that a weak dollar may not necessarily revitalize American manufacturing. In the 2000s, the dollar weakened, but this did not prevent a sharp decline in factory employment. He also stated that deliberately creating a weak dollar may require the help of international partners. If Trump returns to the White House, he may try to seek help from other countries on currency issues This practice has a precedent. In 1985, then Treasury Secretary James Baker III signed the Plaza Accord with representatives from Japan, the UK, Germany, and France. The accord called for coordinated intervention to intentionally weaken the US dollar, which was ultimately successful. However, given Trump's tariff proposals and demands for US allies to pay more for defense costs, Obstfeld doubts whether Trump can easily persuade Europe and Japan to agree to a similar deal today. These two policies have angered America's allies during his 2017-2021 term in the White House. Steve Englander, Global Head of G-10 FX Research and North America Strategy at Standard Chartered Bank, stated that a weak US dollar has significant implications for Trump. A strong US dollar is seen as a vote of confidence in the US economy, while "a weak US dollar is associated with a weak US economy." The Trump campaign team did not respond to requests for comment. The market expects more rate cuts from the Federal Reserve in 2025, and allowing the market to naturally evolve may be a better choice than taking additional measures to intentionally weaken the currency