The dollar has gained since Trump’s election and his policies could boost the greenback further.
A stronger dollar could suppress global trade and complicate inflation abroad, a think tank researcher said.
“Without much scope for a negotiated decline in the dollar, more chaotic alternatives seem likely.”
Donald Trump’s proposed policies are likely to give the US dollar a boost during his second term, but a stronger US currency has the potential to unleash chaos in global markets, according to one think tank researcher.
Michael Klein, a senior research fellow at Chatham House, an international affairs think tank, wrote this week that the dollar will likely rise under Trump, despite Trump’s own suggestion that he would like to see a weaker dollar to slim the US trade deficit.
That’s unlikely to happen, Klein said, largely because the greenback’s other currency rivals remain challenged and because Trump’s policies are bullish for the dollar.
“President-elect Donald Trump has a dollar problem. In recent months he has shown a clear preference for a weaker exchange rate to support the competitiveness of US exports and help reduce the US trade deficit. And yet, as the market has sensed since the US election, the much more likely outcome is that his policies end up strengthening the greenback. The risk is that the US dollar— which is expensive already — becomes more obviously overvalued, and this could increase the risk of global financial stability,” Klein wrote.
Klein said a stronger dollar could be bad news for other economies around the world. Given how widely the greenback is used across financial markets, global trade could be suppressed if the dollar gains in value.
Countries that find their currency devalued against the dollar, meanwhile, could have a harder time taming inflation.
“If and when the dollar becomes unsustainably expensive, a further problem will present itself: how to deal with an overvalued currency without risking a lot of financial dislocation,” Klein said. “Without much scope for a negotiated decline in the dollar, more chaotic alternatives seem likely.”
Markets have already picked up on the likelihood of a stronger US currency under Trump’s presidency. The US Dollar Index, which weighs the greenback against a basket of currencies, has climbed around 3% over the last month and briefly surpassed 107 on Thursday, its highest level in a year.
Several of Trump’s policies are supportive of a stronger US currency. Klein pointed to Trump’s plans for steep tariffs, which include a 10% blanket tariff on most US imports and a 60% tariff on Chinese imports.
