Is the world facing a dollar yoke? – Commerzbank

During his last presidency, Donald Trump did everything he could to weaken the US dollar. This is because a weak dollar improves the price competitiveness of American exporters and those American companies that compete with imports, without those American companies having to lift a finger, or perhaps even understand the point, to offer better or more cheap. Now, however, the “stable genius” seems to have changed his mind. He is now threatening retaliation against anyone who actively works to end USD dominance. As “punishment,” he threatens to impose a 100 percent import tariff, notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

Trump could make USD weaker

“US Treasuries are the best safe haven for global investors. Again, this is largely a convention. However, this convention would be challenged if the denomination of US Treasuries were no longer in the currency in which global trade is conducted. However, since the US has been able to substantially expand its national debt due to the safe-haven nature of the US Treasury, the loss of this feature would be a serious blow to US Treasury debt sustainability.”

“We saw something similar in Italy, where the introduction of the euro suddenly gave Italians an alternative to BTPs in the form of German Bunds denominated in their national currency. However, a “debt crisis” for the US Treasury would primarily take the form of a weak US dollar. In other words, the reduction in US debt leverage that would be required if the rest of the world stopped financing US current account deficits would lead to massive dollar weakness.”

“In addition to the potential damage to Fed independence, we already have a second scenario that could trigger massive USD weakness if Trump wins the election. You don’t have to! Don’t get me wrong. Barring dramatic scenarios, there are still plenty of arguments on the sidelines for USD strength under a new Trump presidency. However, another scenario has been added that could end in extreme USD weakness. Anyone who needs to pay close attention to major USD risks should keep this in mind.”