If all goes according to plan, Donald Trump will bolster Corporate America through a cocktail of tax reform, regulation rollbacks and Keynesian-style stimulus.
But his policies could also put upward pressure on the U.S. dollar, hampering the global competitiveness of the very companies he's trying to help.
The greenback jumped after the election, in part buoyed by the prospect of a free-spending Trump government. It's the latest chapter in a bull run that's seen the U.S. dollar index – which measures the greenback against a basket of major currencies – jump 26 per cent over the past three years.
The bull run is expected to continue. "Our overall assessment is that Trump will be highly supportive of the dollar," Deutsche Bank said Thursday in a report, citing the president-elect's coming central bank appointments and corporate tax reforms as the key drivers.
Here's how a dollar surge could unfold:
The Trump administration uses fiscal stimulus, such as infrastructure spending, to juice growth. In turn, inflation jumps above the Federal Reserve's 2-per-cent target. The Fed, already on a path to tighter policy, responds by hiking interest rates. Yield-hungry traders pile into U.S. investments, driving the greenback higher.
Of course, currency moves have ramifications.
Imports would cheapen, a victory for U.S. consumers. And there tends to be an inverse relationship between the U.S. dollar and oil prices. Chalk up a win for consumers at the gas pump.
But U.S. exports would be more expensive to peddle abroad. Further, foreign sales would be converted back to U.S. dollars at worse rates, a direct blow to earnings.
Foreign revenue is crucial for American firms. Among S&P 500 companies that disclose foreign revenue, 44.3 per cent of sales in 2015 came from overseas, according to an analysis from S&P Global.
Take Apple Inc. as an example. The world's most valuable company derived 60 per cent of its $216-billion in revenue for fiscal 2016 from outside the Americas.
Michael Hewson, chief market analyst at CMC Markets, writes that "at some point the strength of the U.S. dollar may well start to impact on U.S. corporate profits … For now U.S. investors don't seem too concerned about that prospect, so caught up are they in the euphoria of the 'Trump trade,' but at some point overseas profits will take a hit in currency terms."
One policy is expected to shake up the dollar in a big way: the border adjustment tax.
Part of a Republican plan to overhaul the tax code, it would tax imports at the corporate rate and exempt exports from taxation. The aim is to bolster domestic producers.
In theory, the U.S. dollar would substantially appreciate if such a tax goes into effect, offsetting at least some of the impact. (Lower import prices would dull the pain for importers, while benefits for exporters would be neutralized by lower demand.)
That's assuming the dollar reacts as expected. If, for instance, the dollar barely budged, U.S. importers would get whacked.
Inflation could spike, too, given the difficulty of rerouting global supply chains. This would hit the wallets of U.S. families, and again, the Fed could be forced into action.
But even if the impact is minimal for American companies, there's a broader impact: much of the world's debt is denominated in U.S. dollars. Servicing that debt could become prohibitively expensive for foreign entities, posing risks to the global economy.
There's a big caveat to the dollar's bull case: Mr. Trump might not do what the markets expect him to. Since his Wednesday press conference, which offered scant mention of his economics plans, the greenback is slumping. For some, it's a welcome relief.
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