Is the world facing a dollar yoke? – Commerzbank

During his last presidency, Donald Trump did everything he could to weaken the US dollar. This is because a weak dollar improves the price competitiveness of U.S. exporters and those U.S. companies that compete with imports, without those U.S. companies having to lift a finger, or perhaps even get the idea, to offer better or cheaper products. Now, however, the ‘stable genius’ seems to have changed his mind. He is now threatening retaliation against anyone who actively works to end the dominance of the USD. As ‘punishment’ he is threatening to impose 100% import tariff, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

Trump may make the USD weaker

“US Treasuries are the ultimate safe haven for global investors. Again, this is largely a convention. However, this convention would be challenged if the denomination of US Treasuries were no longer in the currency in which global trade is conducted. However, since the US has been able to expand its national debt substantially because of the safe-haven nature of US Treasuries, the loss of this feature would be a severe blow to the debt sustainability of the US Treasury.”

“We have seen something similar in Italy, where the introduction of the euro suddenly gave Italians an alternative to BTPs in the form of German Bunds denominated in their domestic currency. However, a ‘debt crisis’ for the US Treasury would primarily take the form of a weak US dollar. In other words, deleveraging by the US, which would be necessary if the rest of the world stopped financing the US current account deficits, would lead to massive dollar weakness.”

“In addition to the potential damage to the Fed's independence, we already have a second scenario that could trigger massive USD weakness if Trump wins the election. It doesn't have to! Don't get me wrong. Without dramatic scenarios, there are still plenty of arguments at the margin for USD strength under a new Trump presidency. However, another scenario has been added that could end in extreme USD weakness. Anyone who needs to pay special attention to the major USD risks should keep this in mind.”