Important points
The president has long been indifferent to a weaker dollar because it could make American products cheaper overseas, especially for U.S. multinationals, but a weaker dollar signifies a decline in confidence in the United States as foreign investors become increasingly wary of the country’s fiscal outlook.
A weak dollar doesn’t matter to President Donald Trump, but there are reasons why it matters to investors. The dollar on Tuesday suffered its worst single-day decline since April, as the dollar has fallen 10% over the past year, after President Trump refused to say the dollar had fallen too much. There was a slight rebound on Wednesday. When asked about the weak dollar, President Trump said, “I think it’s a great thing,” but he has long been indifferent to the weak dollar because it allows American products to be sold cheaper overseas. This could particularly benefit US multinationals. But it also signals a decline in confidence in the United States, as foreign investors become increasingly wary of the country’s fiscal and economic outlook. “A weak dollar is a barometer, not the weather,” Steve Englander, head of global G10 currency research at Standard Chartered, told CNBC. “It helps improve competitiveness in a narrower sense,” Englander said. “But if it reflects that investors are more concerned about your economy and more concerned about the various policies that your company might implement.” First, a weaker dollar could have a negative impact on the U.S. debt market, increasing investors’ demand for a risk premium on bond holdings and making it more expensive for the U.S. government to finance the massive federal deficit of $1.8 trillion in fiscal 2025. Eventually, the chicken will go back to head global G10 currency research at Standard Chartered Steve Englander Concerns about the US’s growing budget deficit appear to be already showing up in the bond markets. The yield on the 10-year U.S. government bond has been around 4.16% since the beginning of the year, but it has exceeded 4.25% this month alone. “If foreign investors believe the dollar is about to enter a more sustained second-leg decline, they will clearly withdraw from future purchases of U.S. Treasuries,” Peter Cawley, chief market strategist at Pave Finance, wrote on CNBC. To be sure, there may be a lower bound to how weak the US dollar can become. As an example, Pave Finance’s Cawley said the 10-year Treasury yield remains in the 3.85% to 4.60% range, and it would be even more problematic if it crossed a “tripwire” above that range. Another reason is that the dollar could attract buyers if other parts of the world, such as Europe or China, begin to show signs of economic downturn and the U.S. dollar becomes the “least unpleasant” option, Corey said. Once productivity starts to recover, a weaker dollar may not be an issue. Standard Chartered’s Mr. Englander said he was watching closely to see whether improvements in corporate productivity and economic expansion were enough to keep the government’s budget deficit at pace. “If we’re right that productivity growth is picking up, then GDP will pick up, federal revenue will pick up, and the deficit situation won’t be as dire as it is right now,” Englander said. “If we’re wrong, we’re in a bit of a problem because we’re just a country that spends too much.” “Eventually, the chickens come home to roost,” he added.
