U.S. President Donald Trump says further Federal Reserve rate cuts would lower the value of the dollar and help the country’s trade position.
They haven’t so far this year, and likely won’t as long as the world economy wobbles through an epoch of slowing growth and doubt about the future of the global trading system – forces likely to keep the dollar higher even if Fed rate reductions tend to undercut it.
The dollar’s value against a global basket of currencies was trading on Thursday roughly where it was at the start of the year, before Fed officials not only pivoted from a full percentage point of expected rate hikes, but actually cut 0.75 percentage point from the target policy rate.
In the interim, the dollar climbed a bit, fell back, climbed higher still and fell again.
Net result: not a lot.
Since the Fed last raised rates in mid-December, a broad dollar index is essentially unchanged. Since January, when Fed chair Jerome Powell first made clear rate hikes were on hold, the dollar has actually strengthened 1.2 per cent, even as the projected level of Fed interest rates fell fast.
That fact would be unsurprising to economists who regard currency values as notoriously unpredictable.
In theory, if a country’s central bank lowers rates, it should make interest-yielding investments in its home currency less attractive than those in other countries, decreasing demand for that currency and lowering its value.
That’s the dynamic Mr. Trump wants the Fed to tap.
But the relationship is hardly mechanical. Larger market forces and perceptions come into play, and the dollar’s singular status as the world’s reserve currency – something Mr. Trump has lauded – means demand for it is broad and steady.
Even if the Fed cut deeper and faster than other central banks, “the global slowdown caused by the trade war is also boosting the dollar,” said John Doyle, vice-president for dealing and trading at Tempus Inc. in Washington. “Brexit, Hong Kong, North Korea, Turkey. There are lots of geopolitical concerns to boost the buck.”
“I do not think that is realistically possible,” to lower the dollar with Fed rate cuts, Mr. Doyle said. “As we have seen, three rate cuts and the dollar is still strong. ... I understand why President Trump doesn’t want a strong dollar. But if he is looking for a fix, perhaps he should turn inward and find an end to the trade war and the uncertainty surrounding it.”
The United States and China have been engaged in a tit-for-tat tariff war for more than year.
The Fed at its meeting this week cut its target policy rate for the third time this year, to a range of between 1.5 per cent and 1.75 per cent, but also signalled that the reduction would be the last unless the economy deteriorates.
Mr. Trump on Thursday repeated his frustration with the Fed for not cutting deeper and faster, saying that other central banks “are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting our manufacturers. We should have lower interest rates than Germany, Japan and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway.”
It is true that other major central banks have loosened monetary policy this year in decisions that would, all things equal, raise the value of the dollar. It is also true that U.S. exports have lagged, possibly as a result of the higher value of the U.S. currency, which would make U.S. goods cost more in the currency of an importing country, but also because global trade in general has slowed in the midst of the U.S.-China trade war.
But embedded in Mr. Trump’s tweet is, arguably, the more central reason for why the dollar remains strong: The U.S. right now is the one major economy on a solid footing. Japan is battling to avoid deflation. Germany may be entering a recession.
Mr. Trump has spoken approvingly of the negative interest rates paid on government bonds in those countries, looking at it through the lens of a government official whose budget would benefit from lower borrowing costs. But officials in those countries fret daily about the impact on savers and financial markets generally. One reason those countries have negative interest rates is their poor economic performance, and so far, negative rates have not been a cure for larger economic problems.
In that context, Fed tinkering with short-term U.S. interest rates is unlikely to put off investors who see the U.S. as both a safe haven in uncertain times, and the place to earn a positive return.
For a true bout of “dollar bearishness,” said Bipan Rai, head of foreign exchange strategy in North America for CIBC Capital Markets in Toronto, the economic outlook will need “to take quite a sustained turn for the worse.”