After years of threatening a devaluation, in the face of China’s own currency manipulation, President Trump recently indicated that he is now in favour of a strong dollar. Given the President’s inconsistency on the issue, and the current turbulent economic environment, what exactly would a second term entail for the most important currency in the world?

How a second Trump term could impact USD

The crucial distinction here is one of means versus ends. In the mind of President Trump, the currency is just a tool to deliver a buoyant stock market and booming economy, whatever he might tweet.

The Trump administration will do whatever it takes to catalyse the recovery, whether appreciation or depreciation is the required remedy. In our view, the latter will prove to fit the bill, and so the US dollar’s value will fall if the Trump train continues to roll through November.

Whilst the dollar has been relatively stable in its value over the course of Trump’s first three years in office, the gargantuan nature of the economic task at hand means that this trend simply cannot continue.

When he began his first term, the economy looked to be in a relatively healthy state. Discounting the remote possibility of a miraculous economic recovery, his second term will debut in very different circumstances.

Massive relief spending set to continue

Looking at the demand side, one could be forgiven for assuming that a dollar appreciation was imminent. The US economy comfortably outperformed the G7 and G20 averages in the first quarter of 2020, shrinking by just 1.3% compared to 2% and 3.4% respectively.

This is likely the result of mammoth congressional stimulus packages, which have allowed the US to lead the world nominally in terms of relief spending and come second in terms of percentage of GDP.

A second Trump term would almost certainly see further waves of relief, likely in the form of his $1 trillion infrastructure plan. This particular avenue of execution benefits from relatively healthy levels of bipartisan support, meaning that such spending can be expected no matter who controls the Congress come 2021.

US stocks likely to continue outperforming, pressuring USD

And in terms of the stock markets, the US has also consistently outperformed global averages throughout the President’s first term, including in the post-Covid era.

This is exemplified by the fact that the S&P 500 index has risen by over 50% since 2016, whilst the FTSE has fallen by around 9% in this same period. Given all of the above, the US is likely to continue attracting investors the world over, delivering inflationary demand-side pressures that would support USD.

However, the aforementioned upward pressure caused by a healthy economy will be insignificant when compared with the deflationary pressure instigated on the supply-side.

Federal Reserve stimulus measures will help Trump get weaker dollar

Since February, the Federal Reserve has increased its balance sheet by almost $3 trillion, moving from $4.2 trillion to $7 trillion. This rapid increase is expected to continue, with Trump calling the policy ‘something that’s really great for our country’.

In addition, the possibility of extreme measures in the form of yield curve control is rising, with several current Fed governors commenting that the policy should be on the table if necessary.

All of this is indicative of our central point: the authorities are prepared to do whatever it takes to prop up the stock market and the real economy and will stop at nothing to achieve this end.

Expanded balance sheet, flat interest rates, yield curve control to cause dollar depreciation

Trump has repeatedly held up rising stock prices as a beacon of success in his first term and will continue to do so if he wins a second. With quasi-control over the Fed, afforded to him by his position at the bully pulpit, the President will get what he desires, no matter the cost.

In this particular instance, the cost will be an expanding Fed balance sheet, rock-bottom interest rates and, if it comes to it, yield curve control measures. The sheer enormity of the response on the supply-side will be more than enough to drown out any inflationary pressures on the demand-side – depreciation inbound.

Overall, Pres Trump doesn’t really care about the value of the dollar outside of its utility as an economic tool or a stick with which to hit China. The real motivation behind the President’s actions in a second term will mirror those of the first: growth in the stock market and the real economy, in that order of importance.

In his pursuit of these goals, no policy instrument is off limits, whether it be a trusty expansion of the Fed’s balance sheet, or an as yet untested tool like yield curve control.

Whilst the Fed is technically a quasi-independent body, such independence is illusory, particularly in the context of Trump’s propensity for the use of public pressure. Whilst some demand-side inflationary effects will be initiated by a better-than-average recovery, such effects will be lost in the vastness of the supply-side avalanche that is to come.

If he achieves a second term, Pres Trump will leave office in 2024 having achieved two things that he initially desired: a stock market on the rise and a depreciated dollar.