Credit Agricole: Does Trump want a weak or strong USD?

Trump’s recent comments and trade policies reveal contradictions regarding his stance on the USD. While protectionist policies could suggest a preference for a weaker USD to reduce trade deficits and boost competitiveness, fiscal spending and borrowing needs may lean toward a stable or strong USD to sustain debt financing and avoid inflationary pressures.

Key Points:

• Protectionist Policies and a Weak USD:

  • Protectionism could reduce global trade reliance on the USD, lowering demand for the currency.
  • A weaker USD could improve US international competitiveness and help reduce trade deficits.

• Fiscal Spending and Debt Considerations:

  • Trump’s fiscal expansion plans might require a stronger or stable USD to maintain financing conditions and control imported inflation.
  • A weak USD could complicate borrowing by increasing inflation and funding costs.

• Inconsistencies in USD Policy Objectives:

  • Trump’s trade policies create uncertainty as they attempt to balance reducing trade deficits while maintaining USD’s appeal as a reserve currency.
  • This inconsistency may lead to mixed signals for FX investors about Trump’s true USD preference.

• Long-Term USD Outlook:

  • Credit Agricole predicts that Trump’s trade policies are likely to result in a weaker USD over time.
  • Portfolio and FDI inflows into the US could offset some of this weakness but depend on delivering a growth premium at a reasonable cost.
  • Demand for USD assets may decline if external imbalances grow or if foreign investors reduce their savings or repatriate funds.

Conclusion:

Credit Agricole sees inherent contradictions in Trump’s policies regarding the USD. While near-term dynamics may appear mixed, the overall trajectory suggests potential for a weaker USD over time due to trade policies and their impact on global demand for the currency.

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This article was written by Adam Button at www.forexlive.com.