Trump has many tricks to weaken the US dollar, but I'm afraid none of them will work!

Barclays Bank's Global Chairman of Research Ajay Rajadhyaksha wrote in the Financial Times that although there are multiple ways for Trump to weaken the US dollar, each one has consequences in practice.

In an interview with Bloomberg last week, the Republican presidential candidate explained that the recent strength of the dollar has hindered the development of US companies and increased export costs. Trump said, "This is a huge burden for our companies trying to sell tractors and other things abroad. It's a huge burden."

According to Barclays Bank's data, since March 2020, the exchange rate of the US dollar against the Indian Rupee has risen by 15%, and the exchange rate of the US dollar against the Japanese Yen has risen by 50%.

Rajadhyaksha pointed out that there are some obvious major driving factors behind the surge in the US dollar. Since 2020, the US has outperformed most major economies. Due to inflation and economic recovery-driven growth, the country's interest rates have remained high, attracting foreign capital into US government bonds.

Meanwhile, driven by the artificial intelligence boom, US stocks have been soaring. Capital from around the world is eager to get a piece of these billion-dollar tech giants. Additionally, the US is an energy superpower, self-sufficient in oil and a leading exporter of natural gas.

In conclusion, there are many reasons to hold the US dollar. But will this situation change? There is now a pressing question at hand.

Since the first presidential debate at the end of June, the betting markets have considered Trump to be the undisputed frontrunner. And at the recent Republican National Convention, he selected Senator JD Vance as his nominee for Vice President.

Vance, like Trump, favors a weaker US dollar. In a Senate hearing last year, he questioned the advantages of the US dollar's reserve status, believing that its negative impact outweighs the positive.

Vance told Politico in April, "‘Devaluation’ is certainly a scary word, but its true meaning is that US exports become cheaper."

This means that on the negative impact of a strong US dollar on US manufacturing, the Republican leadership is united and committed to taking measures to reverse this impact.

The message is clear. If Trump is re-elected, weakening the US dollar will be a policy goal. With the increasing possibility of Trump reclaiming the presidency, the US dollar index has recently seen a slight decline. However, weakening the US dollar to a greater extent as desired by Trump is not as simple as imagined.

Various Ways to Weaken the US Dollar Are Ineffective

In theory, the US government should be able to weaken its currency very easily: printing much more currency than other countries, selling it on the open market, and then waiting for it to depreciate.

In practice, the Federal Reserve would start buying euros or yen for its balance sheet, such as buying sovereign bonds from Germany or Japan. In this process, the Fed would increase the amount of dollars in the financial system. If the scale is large enough, it would start to affect the foreign exchange market. This is known as "twisted quantitative easing (QE)." However, the Federal Reserve is unlikely to start selling the US dollar and buying other currencies just because of the change of government. It is also concerned that increasing the size of its balance sheet could trigger a new round of inflation.

At the same time, do not expect senior personnel changes to make the Federal Reserve more compliant. Powell has repeatedly stated that he will remain in office until May 2026. Trump recently admitted that he does not intend to remove him from his position as Federal Reserve Chairman before the end of Powell's term, and all former presidents believe this is legally impossible. The Federal Reserve is unlikely to be willing to cooperate.

Of course, there are other options, but these options are more difficult to implement. The US Treasury could borrow an additional trillion dollars, for example, and then use dollars to exchange for other currencies in the open market.

However, Congress must first raise the debt ceiling, and issuing additional debt purely to weaken the currency is likely to stimulate the US Treasury market, prompting the Federal Reserve to raise interest rates because a sudden weakening of the dollar implies rising prices.

In addition, intervening to defend the national currency is also an option, as Japan is currently doing. It is quite difficult for governments that wish to consciously weaken their national currency's influence on the world, especially when the US is the world's largest economy and has a huge current account deficit. Other countries will not sit idly by and can adopt a strategy of taking advantage of their neighbors.

For governments that want to weaken their national currency, perhaps the simplest way is to seek help from other countries. In 1985, the Plaza Accord prompted the five major economies to take coordinated intervention measures to weaken the dollar exchange rate in order to resist protectionist policies. Perhaps a new agreement could threaten other countries with massive tariffs imposed by the US to gain their consent.

However, other countries are unlikely to support this. The Plaza Accord and the subsequent sharp appreciation of the yen can be seen as a factor in Japan's entry into a 20-year period of stagnation, from which other countries have learned valuable lessons.

There is also the issue of tariffs. Trump often boasts of his plan to impose universal tariffs on all US imports in an attempt to enhance America's trade competitiveness. However, Rajadhyaksha warns that raising tariffs usually depresses the currency of the affected country. The initial reaction of the currency market to large-scale US tariffs is likely to be a strengthening of the US dollar, rather than a weakening.

He said: "The reality is that weakening the dollar is at odds with many other policy goals of the Trump campaign team, such as tariffs and tax cuts (tax cuts should drive economic growth, which is usually favorable for the dollar).

In conclusion, there is no simple way out. A famous saying by former US Treasury Secretary Connally goes: "The dollar is our currency, but it's your problem." However, if the US government changes, a new Treasury Secretary who wants to weaken the dollar may find that the dollar is also their problem