Why Trump's Weak-Dollar Policy Threatens the U.S. Stock Rally

  • Tension between trade and greenback policy, say analysts
  • Revenue-generating border adjustment tax seen as less likely

Mnuchin Tells FT He Prefers Stronger Dollar 'Over Time'

Donald Trump’s support for a weaker dollar has the potential to torpedo a key tax-reform proposal that has served as one of the main catalysts of the U.S. stock market rally.

The so-called border-adjustment tax favored by Republicans in the House of Representatives is basically a charge on imports into the U.S. that was supposed to be partly offset by a stronger greenback. The absence of a stronger dollar to serve as a counterbalance against the likely resulting inflationary pressure from the tariff seems to make the tax a less of a possibility.

"I wonder if [Donald Trump’s] observation about the strength of the dollar is a backhanded downgrading of the possibility of the border-adjustment tax -- at least as proposed in the Paul Ryan plan," said Scott Clemons, chief investment strategist at Brown Brothers Harriman in New York. "That plan would theoretically lead to a stronger dollar. So you just think the dollar’s strong now."

The fate of tax reform has been an obsession of U.S. investors since Election Day, with a Goldman Sachs basket of companies with the highest tax rates almost doubling the market’s return between Nov. 8 and year’s end before leveling off since. Cracks in Trump’s growth program have coincided with weaker returns since the start of March, but no market-wide meltdown.

"I can’t figure out what is keeping stocks so buoyant," Bill Blain, a strategist at Mint Partners, a global brokerage firm, wrote in a note. "Maybe it’s expectations of a strong earnings season to come -- my gut feel is it could be disappointing -- or is it still anticipating Trump will push through tax-reform and growth policies?"

Retailers and automakers may benefit from a possible relief rally if the BAT proposal is dropped, given the high amount of imports in their supply chains. What’s more, a weak dollar is traditionally seen as a boon for multinationals that earn an outsize share of their income in foreign currencies.

Trump has sent out mixed messages on the tax proposal.

“Let’s call it an import tax, let’s call it a reciprocal tax,” he said in a Fox Business Network interview this week, objecting to the term “adjustment” without clearly stating whether he supports an import tax. The comments may imply he prefers outright tariffs on individual trading partners, according to analysts, which would also boost the greenback’s strength.

The trade-off between the administration’s trade objectives and its preference for a weak dollar appears to be finally dawning on the president, vexing the tax-cut agenda, Lindsey Group’s chief market analyst Peter Boockvar wrote in a note.

"While it’s now official that Donald J. Trump doesn’t like a strong dollar, it’s not a complete surprise considering his bizarre obsession with trade deficits but now we have confirmation," he said. "The implications run right into possible tax reform and the border adjustment tax constantly bandied about."

The administration hasn’t yet presented a tax proposal. While Treasury Secretary Steven Mnuchin had earlier set an August target date for passing legislation, Trump didn’t commit to that deadline in his Fox interview. “I don’t want to put deadlines,” he said.

Investors may have a long time waiting.

— With assistance by Andrew Mayeda, and John Voskuhl

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