[The Viewpoint of Dongki Kim] Is the Dollar Depreciation Desired by Trump Possible?

Neutralizing the Fed, Expansionary Monetary Policy
Taxing Foreign Holders of U.S. Treasuries
Accelerates Inflation, Limits Effectiveness of Dollar Depreciation

In a few days, the second Trump administration will take office. One of the focal points of interest is the direction of the recently strong dollar value. The Trump administration’s initial plan is to lower the dollar value to enhance the export competitiveness of American companies and improve the trade balance. However, questions arise as to whether this is a reasonable approach. The most certain way to depreciate the dollar is for the Federal Reserve to implement an expansionary monetary policy.

To neutralize the Fed’s resistance, the Trump administration might attempt to replace Fed Chair Powell, but monetary policy decisions are not made by the chair alone; they are handled by the Federal Open Market Committee, which consists of 12 members. There is also the possibility of amending the law to make the Fed subject to executive branch directives. If that happens, the Fed’s independence would be compromised, leading to increased market distrust and a dramatic drop in the dollar’s value. However, even if the Fed accepts the Trump administration’s direction, expansionary monetary policy would accelerate inflation, which could largely offset the effect of a declining dollar value.

Additionally, the Treasury Department could impose taxes on foreigners holding U.S. government bonds. This would reduce foreign demand for dollar assets and lower the dollar’s value. The problem with this approach is that demand for U.S. Treasury bonds would decrease, and current bondholders might sell off their holdings, potentially causing interest rates to rise. Furthermore, the Treasury could use the Exchange Stabilization Fund to purchase foreign currencies and increase the dollar supply to lower the dollar’s value.

This would increase inflationary pressure and also affect interest rates. Both methods have limited effectiveness in depreciating the dollar. The Trump administration might attempt a so-called “Mar-a-Lago Agreement,” similar to the 1985 Plaza Accord, where the U.S., Eurozone, and China cooperate to weaken the dollar. However, China remembers that after the Plaza Accord, the yen appreciated, leading to the decline of the Japanese economy. China is unlikely to cooperate with the U.S. Ultimately, the U.S. could pressure the Eurozone with tariffs to lower the dollar’s value and raise the euro’s value through bilateral cooperation.

However, the benefits to the U.S. would be limited, while Europe could suffer significant damage. Thus, the plan to restore export competitiveness through an artificial depreciation of the dollar is realistically difficult to materialize. The Trump administration aims to improve the trade balance using tariffs. But when the U.S. imposes import tariffs on trading partners, those countries tend to sell their own currencies in the foreign exchange market to offset the dollar price increase caused by tariffs by weakening their currency’s value. For example, when Trump imposed trade sanctions on China in January 2018, the Chinese renminbi depreciated by about 10%. In other words, depending on the behavior of trading partners, tariffs could actually cause the dollar to appreciate, which could hinder U.S. exports.

Moreover, if tariffs reduce U.S. imports, the amount of dollars sold in the foreign exchange market decreases, which could strengthen the dollar. This also does not help the U.S. trade balance and only increases global trade costs. The Trump administration is likely to extend the tax cut policy introduced in 2017. If the tax cuts stimulate the economy and increase inflationary pressure, interest rates are expected to rise, which could lead to a stronger dollar. Additionally, since the economic conditions in Europe, China, and the Global South are poor relative to the U.S., capital flows into the relatively better U.S. economy. Coupled with high uncertainty about Trump administration policies and increased financial market volatility, paradoxically, funds tend to flow into safe dollar assets. Although this situation is not good for the global economy, it seems difficult for the dollar to shift to weakness in the near term.

Kim Dong-gi, author of ‘The Power of the Dollar’ and attorney