Limited Capacity for USD Exchange Rate Intervention, Market Challenges Persist
The latest research report from Hua Chuang Securities indicates that the Trump administration may struggle to effectively intervene in the USD exchange rate. Although Trump favors a weak dollar policy, there are inherent contradictions with his other economic policies such as tariffs, tax cuts, and immigration. The report emphasizes that since the establishment of the floating exchange rate system in the 1970s, the USD rate has usually not been a direct target of U.S. economic policy but has instead been determined by the market. The U.S. only takes action to intervene when there is a severe imbalance or excessive volatility in exchange rates.
The report lists five potential USD exchange rate intervention methods by the U.S. government, all facing significant constraints:
- Foreign Exchange Stabilization Fund Operations: The Treasury Department intervenes by buying or selling USD through the Foreign Exchange Stabilization Fund. However, as of the end of September 2024, the fund's total assets were only $214.7 billion, limited in scale and lacking sufficient resources.
- Federal Reserve Policy Coordination: This could involve rate cuts or direct foreign exchange intervention, but as the Federal Reserve is an independent body, it typically does not support politically motivated currency interventions.
- Capital Controls: Imposing restrictions or taxes on capital flows, but this conflicts with the openness of the U.S. capital markets and could seriously harm the dollar's status as a reserve currency.
- Tariffs and Pressure: Imposing high tariffs on other nations to indirectly force them to intervene in their exchange rates, but tariffs themselves strengthen the dollar, making it challenging to achieve a weaker dollar.
- Joint Agreement Intervention: Similar to the 1985 Plaza Accord, a multilateral collaboration is difficult to recreate given the current international political and economic landscape.
Strong Dollar Trend Due to Policy Continuation
The combination of Trump's policies is likely to keep the dollar relatively strong. In Trump’s first term in 2017, the dollar index fell by about 10% due to policy expectation disparities, but with the current political environment holding sway across all three branches, policy implementation is expected to face less resistance, making a significant weakening of the dollar unlikely. Trump's tariff and immigration policies might continue to exert economic pressure but also reinforce the dollar's safe-haven demand in global markets.
Economic Impact: High Risks of Intervention, Rate Adjustments Difficult
A long-term strong dollar has profound effects on both the U.S. economy and global markets. A strong dollar may weaken U.S. export competitiveness and exacerbate the trade deficit; simultaneously, economies outside the U.S. could face greater pressure due to rising costs of foreign debt. If direct intervention in the dollar is implemented, it might trigger market volatility, undermine investor confidence, and affect the dollar's international credibility.
For the global economy, a sustained strong dollar could increase the risk of capital outflows and currency depreciation, particularly in emerging market countries. Additionally, if Trump's tariff policies exacerbate trade tensions, it may further disrupt the global economic recovery.
The Trump administration's capacity to intervene in the dollar exchange rate is limited, with intervention methods being costly and risky. Although a weak dollar policy might be an objective, the current combination of policies may strengthen the dollar's position, and the market needs to remain cautious of potential fluctuations.
