That’s the title of an op-ed appearing in Nikkei newspaper (日本経済新聞):
Chinn, as translated, in The Nihon Keizai Shinbun.
Over the past four years, the US dollar has exhibited noticeable strength. The dollar appreciated 17% in inflation adjusted terms from mid-2014 to the eve of the election; upon the election of Donald J. Trump, the dollar again jumped another 5% in anticipation of fiscal stimulus and the Fed’s interest rate response. Throughout 2017, as the Trump Administration struggled to deliver on tax cuts and an infrastructure program, the dollar faded – only to surge with the passage of the tax plan, and the Fed’s stated intent to raise interest rates. The dollar now stands 20% stronger than it began its ascent.
The sustained appreciation of the dollar, combined higher interest rates, has placed tremendous stress on the global economy. And even more stress on the emerging market economies. Is there hope for relief in the near future? It’s hard to see how. Should the US economy slow, the dollar will depreciate, but it’s a race – between the US slowdown and the rest of the world. And should the world go into recession, the US dollar will likely serve as the safe haven currency, appreciating rather than depreciating further.
What could avert a continued strong dollar? It’s important to realize that the collision of fiscal and monetary policy is not inevitable. Had the Republican coalition not unleashed a supremely irresponsible fiscal program comprising massive tax corporate tax cuts and loosening budget constraints, the Fed would not have had to embark on such a vigorous program of monetary tightening. Almost as damaging, if not more, was the heightened policy uncertainty engendered by Mr. Trump’s erratic pronouncements regarding tariffs and other trade policies. The chain of events and consequences follows.
1. The Dollar’s Ascent
The dollar began its rise in mid-2014. It is hard to understand this event in the context of conventional economic measures, as the most reliable determinant of the dollar’s value is the interest differential. With the Fed funds rate stuck at the zero lower bound from the end of 2008 to the end of 2015, it is hard to discern this effect. However, using the shadow Fed funds rate, which is inferred from the from longer maturity bond rates, there is a more pronounced positive relationship between US interest rates and the dollar’s value (Figure 1).
