Trump advisers are plotting dollar devaluation if he gets elected

Donald Trump’s re-election could have major ramifications for the U.S. dollar, with his former economic advisers already plotting ways to devalue the currency if he wins the White House this fall.

According to Politico, Trump’s former trade adviser Robert Lighthizer and several policy allies would seek to make American trade more competitive by purposely weakening the dollar.

“Currency revaluation is likely to be a priority for some members of a potential second Trump administration, mainly because of the viewpoint that [a stronger dollar] contributes to the trade deficit,” a former Trump administration official told Politico.

Lighthizer was an influential figure in Trump’s White House and the mastermind behind the $200 billion tariffs imposed on China in 2018. He’s also rumored to be Trump’s pick for Treasury Secretary should he win re-election.

Devaluing the dollar might sound controversial, but according to the Brookings Institute, it’s one of the few things that Democrats and Republicans agreed on during Trump’s tumultuous first term.

As president, Trump constantly complained about the dollar’s strength and accused other countries of manipulating their currencies to gain the upper hand in global trade.

In a shocking break from convention, he even went as far as calling on the Federal Reserve to lower interest rates to make the dollar more competitive.

But while dollar devaluation might sound good on the surface, it could have unintended consequences. Experts say it might not be the golden ticket to a stronger trade balance and a healthier economy.

Theory and practice don’t always align

In theory, a weaker dollar would make U.S. exports cheaper, increase the price of imports, and potentially narrow the trade deficit that Trump seems overly concerned about.

But theory doesn't always pan out in practice, especially when the U.S. touts the dollar as the world reserve currency.

If the purpose of dollar devaluation is to increase the price of imports and protect U.S. companies, it could make domestic industries less efficient due to a lack of competition.

“Devaluation can cause inflation in the domestic economy as the prices of imported goods and raw materials increase. This directly impacts consumers’ purchasing power and living standards,” wrote Dr. Christina Chua, a senior vice president at the Singapore-based KGI Securities.

She called devaluation a “double-edged sword” that could lead to other nations devaluating their currencies to remain competitive. This could trigger “a ‘race to the bottom’ or a currency war,” she explained.

Devaluation could also erode the global appeal of the U.S. dollar, which is the dominant currency in international settlements and the preferred method of payment in many parts of the world.

While economists can debate the pros and cons of currency debasement, the real question is to what extent it could be used to weaponize trade. If Trump’s first term is any indication, a weaker dollar could be accompanied by tariffs.

According to economist Peter Schiff, the biggest loser from tariffs is the average American consumer.

During his time in office, Trump downplayed this issue by “saying it would be very easy for Americans to avoid higher prices by bringing manufacturing back home, where tariffs won’t apply,” Schiff said.

But the problem is that Trump “seems to believe American firms that have relied on foreign production for decades can just start producing domestically,” Schiff explained.

Nevertheless, a second Trump term could be emboldened to do something about the dollar, given how overvalued it is relative to other currencies.

How overvalued is the dollar?

The U.S. Dollar Index—a broad measure of the greenback’s strength relative to six major currencies—is up nearly 5% this year, thanks to the Fed's rhetoric pointing to higher interest rates for longer.

According to the International Monetary Fund (IMF), the dollar has been overvalued for much longer than the past few months. By their estimates, the greenback was a whopping 91% above its baseline in 2023, a new record high.

The IMF said the dollar is punching above its weight because of its growing demand as a global reserve currency and higher trade in emerging markets.

While overvaluation might seem like a risk, “history also shows the dollar tends to move in multi-year cycles,” wrote Dr. William Sterling, a global strategist at Boston-based investment firm GW&K.

“Given record-high overvaluation, the risks seem tilted toward years of declines,” Sterling said, pointing to the likely softening of the dollar in the near future.

This view is shared by Vanguard strategy analysts Ian Kresnak and Lukas Brandle-Cheng, who wrote in January that the “U.S. dollar is unlikely to continue defying gravity.”

“A new, proprietary Vanguard model estimates that the U.S. dollar is roughly 12% overvalued against a basket of five leading currencies heading into 2024. In the coming decade, we estimate the probability of some dollar depreciation at about 75%, with a modest decline of 1.1% annualized the most likely outcome,” the analysts wrote.