How Trump's Trade Agenda Will Affect the Dollar

Foreign-exchange markets are trying to determine what an era of tariffs and border taxes would mean for the value of the dollar.

In textbook models, a border-adjustment tax could trigger an increase in the value of the real effective exchange rate (a measure of a country’s competitiveness once the nominal exchange rate -- the currency traded on the spot markets -- is adjusted for inflation and trade balance). The textbooks also say that it could increase the cost of exports and reduce the cost of imports by an amount that would exactly offset its direct effects. That would then allow the real exchange rate to revert to its natural “equilibrium rate” through a nominal appreciation of the exchange rate because of domestic currency demand resulting from a boost in exports and reduction of imports.