Trump blasts strong US dollar, Yellen shifts blame: Market determines exchange rates

Last week, Trump criticized the strong dollar in a media interview, stating that the United States faces a "serious currency problem" and that the exchange rate of the dollar against the yen and other currencies is "incredible." Regarding the issue of a strong dollar, U.S. Treasury Secretary Yellen did not directly respond but instead publicly shifted the blame to the market.

On Thursday, July 25th local time, Yellen, who arrived in Rio de Janeiro, Brazil to attend the G20 finance ministers meeting, said at a press conference held locally, "In recent years, the United States has been implementing a tight monetary policy," with interest rates higher than in other parts of the world, "which has attracted capital inflows and driven the dollar higher." In a strong economy where the Federal Reserve is working to curb inflation, Yellen believes that the strengthening of the dollar is "indeed expected," stating "we believe that the system should operate in this way."

Yellen stated that over time, the basic economic attributes will be reflected in exchange rates. She pointed out that G7 countries, including the United States, are committed to letting the market determine exchange rates, intervening in the foreign exchange market only in cases of excessive volatility and after consultation with partners.

Promoting exports through a "weaker dollar" is one of Trump's most market-focused policies. Trump has recently accused the strong dollar of harming America's export competitiveness. However, Wall Street doubts that the dollar will depreciate under Trump's administration and instead may appreciate.

Media recently summarized the common views of Wall Street economists, stating that economists expect that if Trump is elected, under unchanged conditions, Trump's imposition of tariffs on U.S. trading partners and tax cuts that could raise inflation and interest rates will stimulate the dollar's rise.

Media reports that during Trump's previous term as president, it was evident that the U.S. president has no direct means to devalue the dollar. A weaker dollar would depend more on the Federal Reserve maintaining low interest rates or the United States forcing other countries to raise their own exchange rates, which could make investors cautious.

Regularly consulting with Trump, some economic advisors have been brewing a dollar-centric trade policy, including potential candidates for U.S. Treasury Secretary under Trump's administration. Among them, Robert Lighthizer, who served as the U.S. Trade Representative in the Trump administration, has an open attitude towards several options to balance the U.S. deficit, including compensating for the deficit by controlling capital inflows into the United States.

Another advisor, hedge fund manager Scott Bessentt, who raised funds for Trump's campaign, has discussed expanding the Biden administration's "friendly outsourcing" policy to establish a tiered system among U.S. partners, allowing countries that can help achieve the goal of devaluing the dollar to gain trade advantages.

In addition to the above methods, Trump can also choose more direct measures, such as verbal intervention or having the U.S. Treasury sell dollars.

Wall Street News mentioned earlier this week that a recent report from Deutsche Bank proposed three ways to achieve a "weaker dollar," but upon analysis, the feasibility of these methods is low. One of them is intervening in the foreign exchange market. Deutsche Bank believes that unilateral foreign exchange intervention would require trillions of dollars, which is not realistic. Moreover, multilateral intervention is also limited because intervening in the market goes against the G7's commitment to letting the market determine exchange rates, and the foreign exchange reserves of major developed economies are not large Compared to intervening in the foreign exchange market, encouraging the outflow of U.S. capital is more likely to succeed. However, Deutsche Bank pointed out that there have been few precedents in history where this method was truly adopted. In the 1970s, Switzerland used this tactic, but the Swiss Franc actually strengthened.

Weakening the independence of the Federal Reserve may be the most effective way to devalue the U.S. dollar, but Deutsche Bank believes that the likelihood of this happening is low. In the next four years, the next U.S. president can only appoint two out of the 12 voting members of the Federal Reserve. Last week, Trump denied any plans to weaken the independence of the Federal Reserve in a media interview and expressed support for Powell to continue serving as the Chairman of the Federal Reserve