Why a soft dollar policy is difficult - Deutsche Bank
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WHY A SOFT DOLLAR POLICY IS DIFFICULT - DEUTSCHE BANK
Donald Trump, last week, repeated his belief that the U.S. dollar should be weaker. Deutsche Bank have taken a look at how this might work, and, in short, they think it'd be difficult.
Firstly, they think that to close the U.S. current account deficit - the point of a weaker currency - would require the dollar to drop as much as 40%. That's partly because a lot of U.S. imports are already invoiced in dollars.
So how might a Trump administration achieve this? Deutsche Bank lays out the following options:
- Unilateral FX intervention.
That would require "trillions of dollars", which neither the U.S., nor its trading partners (apart from Japan) have. Also, "The optics of a Trump presidency buying foreign assets and losing tax-payer money in the process would not be politically palatable."
- Encouraging capital outflows
Deutsche think this too would be difficult, extremely costly and lead to a 70-basis point rise in U.S. Treasury yields. Also, it would have complications for the dollar's role as the world's reserve currency, and, in a bit of litotes, they say "It is hard to imagine foreign disinvestment of U.S. assets driven by capital controls as being an orderly affair."
- Eroding Fed independence
Deutsche think this could be more effective than other options. But the consequences, again, would be dramatic and, they think, even more costly. Also, in practical terms, there are only two slots for FOMC voters up in the next four years.
- What about Japan? As a side note, they observe Japan is the only G7 country with enough FX reserves to move its currency materially, so the yen could be an exception. Japan's Ministry of Finance has already been stepping into markets this year.
(Alun John)
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