Trump Smash Dollar (?)
Polls and betting markets show Donald Trump with a significant lead in the presidential race, and while much will happen between now and Election Day, pundits are already weighing in on the implications for asset markets if he does win. James Cramer of CNBC’s “Mad Money” has a recurring segment called the “Trump Trade”, which currently suggests buying some oil stocks and small caps and avoiding, for example, alternative energy.
What has only started to dawn on people is the equally important point that Trump has broken with decades of presidential tradition and is explicitly calling for a weaker dollar. In fact, although presidents and their Treasury secretaries have all mouthed the strong dollar language, during the last three Republican presidents it has fallen. The DXY index, which measures the international value of the dollar, lost 10.5% under George H.W. Bush, 22% under George W. Bush, and 10.5% under Trump.
While no one can say exactly why this was, researchers at the University of Texas who found statistical significance in the presidential Party-dollar relationship suggest that while Republicans espouse fiscal conservatism, it is actually the Democrats that practice it.1 Recall the tax cuts and exploding deficits under Bush II, followed by relatively tighter budgets under Barack Obama, followed again by tax cuts and deficits under Trump. It is more complicated than that, because the composition of Congress under presidents of different parties also affects deficits and debt increases, but that is beyond the scope of the UT research.2
Another, more cynical explanation is that the Republican donor class includes many “red state” exporters, including of commodities: oil, natural gas, agriculture, etc. These industries benefit from a weak dollar. Meanwhile, the Democratic party donor class centered in New York and California is dominated by finance and entertainment industry moguls who, if they have any preference, would probably choose a strong dollar. Trump, as a red state advocate, has been much more focused on the trade deficit than President Biden, and calls for a weaker dollar to address it.3
This call is echoed by Trump’s VP selection J.D. Vance, who at a hearing “Senatorsplained” the relationship between the strong dollar and trade deficits to Federal Reserve Chairman Jerome Powell, who then gave a short course on the advantages and challenges of a reserve currency.
Trump has also taken to calling himself the “crypto president” and is receiving significant campaign funding from the crypto “industry.” The hardest-line crypto advocates would like to see the dollar lose its reserve status, to be replaced presumably by Bitcoin, Ether, Solana, Dogecoin, or maybe Schlemielcoin (I just minted the last one, which I currently own 100% of but will soon drop on all my subscribers).
Trump’s other main economic desire – understandably, as he comes from the real estate world and is always levered – is for lower interest rates (not until after the election, though). Lower rates should tend to weaken the dollar in an environment of elevated inflation and high U.S. current account deficits. As president, Trump had a very independent Fed under Chairs Yellen and Powell, which raised rates in his term except for one mid-course correction and during Covid. Trump has made it clear that if he returns to office he will exert more control to promote his overall agenda, presumably including over the Fed. Trump told Bloomberg that he’ll allow Powell to serve out his term through 2026, “especially if I thought he was doing the right thing.” (He can only remove Powell for Cause, actually.) Even if Trump stopped short of trying to remove him, he could lean on him.4 The Treasury yield curve is already steepening, presumably as the market anticipates a lower Fed funds rate.
Finally, Trump is promising tax cuts without any explicit plan to reduce spending. While the U.S. economy could grow its way out of the budget deficits he would initially preside over, in the short term the country’s borrowing needs will likely increase. I’m aware of studies that higher import tariffs would tend to appreciate the dollar; I’m skeptical, however, that Trump can figure out how to impose them without causing a global recession. In the past he has used tariff threats for negotiating leverage.
Given the huge outperformance of U.S. stocks vs. the rest of the world over the last 15 years, it’s safe to say that American investment portfolios are heavily domestic.5 Anecdotally, private wealth managers have estimated to me that the non-dollar exposure of many clients is no more than 10-15%. Probably the last time this situation obtained was in the early 2000’s, after the bull U.S. stock market of the 90’s. In the eight years that followed, international stocks outperformed U.S. stocks, and emerging markets outperformed U.S. stocks by a wide margin. This is not surprising, as the highest correlation asset (negative) to the emerging markets index is the U.S. dollar: EMs flourish in conditions of a weak dollar, strong global growth, and some inflation. The best performance run in the modern history of the MSCI Emerging Markets Index was its 326% gain from 2003-2007, during which time the DXY fell by 25%.
To be clear, I’m not predicting a Trump victory, nor am I predicting that he’d be able to implement all the policies he says he wants, nor the direction of rates or the dollar.6 All I am doing is pointing out that non-dollar assets could be a hedge against a second Trump presidency and his agenda, and U.S. investors are likely extremely underweight them.
Ashour, Rakowski, Sarkar, (April 2019) U.S. Presidential Cycles and the Foreign Exchange Market
In recent history, a GOP President and Senate together with a Democratic House yielded the most Brobdingnagian relative increases in our national debt. See Bump, Philip, “Which party had power when the Federal debt rose the most?”, Washington Post, February 7, 2023
Economists are not unanimous that a weaker dollar would fix the U.S. trade and current account deficits. A recent, concise analysis of what determines the dollar’s international value is by Karthik Sankaran, Trump, Vance and the Dollar, https://substack.com/home/post/p-146686548
Richard Nixon pressured Arthur Burns to conduct expansionary monetary policies ahead of the 1972 election, something that had longer-term inflationary consequences.
The U.S. stock market now represents over 44% of world stock market capitalization, but only about 25% of world GDP (15%, adjusting for purchasing power parity).
And I am biased, as an emerging markets fund manager – although 90% of my personal assets outside my own Eastern Europe-focused funds are in dollar-denominated securities and U.S. real estate, just like everyone else.