So, there’s this big story out today about how Donald Trump asked his National Security Adviser about the economic impact of the dollar. He apparently called Mike Flynn at 3AM to ask him about it. Flynn didn’t know the answer and recommended that he ask an economist. Then a whole bunch of economists answered the question. See here, here, here and here for instance. Their responses were generally textbooky (ie, “right”).¹
Now, I’m not an economist, but I am a guy who has traded a lot of foreign exchange over the course of my career. So, as a market practitioner maybe I have a different perspective that can be helpful here.
When people say a currency is “strong” they’re just saying that one currency buys more of another currency. If that currency gets stronger then it buys even more of that other currency. But within the scope of policy discussions this term is usually batted around by people who are implying that they know the “right” value of that currency. For instance, when Donald Trump asks if a “strong” dollar is good or bad he is implying that there’s a knowable price that is optimal. So, if someone tells him a strong Dollar is bad then we can assume that Donald will do things that will attempt to weaken the Dollar because the assumption there is that the dollar is higher than it should be. In fact, this is precisely what he’s been saying, but his rhetoric has mostly boosted the Dollar against foreign currencies which is having the exact opposite impact he’s hoping for. In other words, a more expensive Dollar will only make goods made outside of the USA more attractive which should increase our trade deficit by reducing the relative quantity of goods being purchased from foreigners in the USA.²
The kicker here is that Donald, economists and policymakers don’t actually know the optimal price for currencies. They might tell you they do. But they don’t really know the optimal price of a currency any better than the army of talking heads on financial TV who come out every day to tell you the optimal price of the stock market. As I like to say, price is the equilibrium of liquidity where two willing parties agree to disagree on the future expected value of an asset. Nothing more and nothing less. It could be right, it could be wrong. But Donald doesn’t know the optimal price. Economists don’t know the optimal price. And policymakers selling you hope in exchange for votes definitely don’t know the optimal price.³
¹ – “Textbooky” is not a word, but honestly who gives a shit? In Trump World we all get to make up words however we like. And we all get to declare that our words are the best words.
² – If I had a Dollar policy recommendation it would be to ignore the price of things that reflect the well-being of other things. That is, focus on implementing policy that will help the domestic economy and let the Dollar exchange rate do what the Dollar exchange rate does. If your policies end up being viewed as relatively superior then the Dollar will rise in value and you will have succeeded in making America Great Again.
³ – There’s a whole slew of historical examples of countries who thought they “knew” what the best price of their exchange rates should have been. These countries almost always get blown off their currency pegs due to unintended consequences. The graveyard of forex traders is even deeper which is a mathematical truth since a forex market is a zero sum game before taxes and fees.