Trump’s Trade Focus to Weaken Dollar, Former Japan FX Chief Says

  • U.S. previously favored strong dollar to attract fund inflows
  • Idea of yen as safe haven should become a myth, Watanabe says

President Donald Trump’s “America First” policy aimed at shrinking the trade deficit represents a fundamental change in the country’s dollar strategy, says the former currency chief of Japan’s Ministry of Finance.

The U.S. has traditionally favored a strong dollar to attract funds from abroad and reinvested the money overseas to reap returns from dividends and interest income, said Hiroshi Watanabe, president of the Institute for International Monetary Affairs in Tokyo. For this reason, the U.S. has sought to avoid weakening the dollar but this business model seems to be changing, he said.

“What interests Trump is the size of the U.S. trade deficit, the amount of exports from the U.S., and not the exchange rate or whether the U.S. needs a strong dollar,” Watanabe said in an interview Jan. 31. “While refraining from favoring a weak dollar, the U.S. Treasury Secretary may eventually say the dollar needn’t be strong.”

The dollar slid Tuesday as Trump said China and Japan had unfairly devalued their currencies , whereas Americans sat “like a bunch of dummies.” His trade adviser Peter Navarro said in an interview with the Financial Times that the euro is “grossly undervalued.” An “excessively strong dollar” could have a negative short-term effect on the economy, Treasury Secretary nominee Steven Mnuchin said last month.

Trump’s obsession with trade issues may temporarily push the dollar below 100 yen amid volatile trading but the currency is most likely to remain in a core range of 107 to 115 this year, Watanabe said. The greenback was at 113.26 yen as of 8:33 p.m. in Tokyo on Thursday.

‘Big Transformation’

“A strong dollar was favored solely to let the U.S. make money, but it’s unclear if the lives of the American people were taken into consideration,” said Watanabe, who was vice minister of finance for international affairs from 2004 to 2007. “The U.S. is undergoing a big transformation. There may be delicate implications to exchange rates. The dollar may lose the underlying support to push it higher.”

The dollar initially strengthened after Trump’s unexpected election victory in November amid speculation his plans to boost infrastructure spending would energize the economy and convince the Federal Reserve to rate interest rates faster. Since his inauguration on Jan. 20, the greenback has weakened against all its Group-of-10 counterparts.

Trump’s policies are likely to have a number of negative ramifications for the economy, Watanabe said. Americans will eventually have to pay more for imports as narrowing trade channels make goods scarcer, while the amount of fiscal spending may end up being less than people expect, he said.

Reality Intrudes

“Reality will intrude upon this euphoria -- this illusion -- and financial markets will have to come to grips with that,” Watanabe said. “By the autumn, markets will gradually price in various factors and move in the direction which may not be what the administration is hoping for. Markets are pricing in the likelihood that Trump will be able to do almost everything he promises, but there are bound to be limits.”

The yen is unlikely to strengthen very much even if the dollar weakens as the safe-haven status of Japanese assets is increasingly questioned, Watanabe said.

“Japan is losing its longer-term strength,” he said. “It’s dangerous to put faith in the yen as a safety currency going forward. Such a notion should become a legend or a myth.”

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