President-elect Donald Trump's vow to "Make America Great Again" by challenging the consensus on globalization and reviving manufacturing in the Midwestern states that voted for him is being severely tested by an unlikely enemy -- the strong U.S. dollar.
Trump is set to unleash the biggest U.S. peacetime stimulus since World War II: $9.5 trillion of corporate and personal tax cuts and a promise to rebuild the country's creaking infrastructure. But market reaction to his surprising election win has taken the U.S. dollar to a 14-year high of 100.56 against a basket of global currencies -- a huge problem for Trump's larger economic ambitions.
The narrative at play in the lead-up to last week's presidential election was that there's too much incentive for multinational companies to produce goods outside of the United States, then turn around and sell their wares to the same U.S. workers who got fired when their factories moved overseas in the first place. It's a compelling story (and hard to argue against in the hollowed-out core of American's industrial heartland), but it's not quite that simple.
To begin with, Trump's "shovel-ready" stimulus plan has lifted commodities prices as traders bet on significantly increased demand for everything from steel to copper to aluminum. That's generally good news for emerging-market economies, where many of the base metals are extracted. But since those same commodities are usually priced in dollars, their value has actually fallen in the wake of the greenback's gains.
Bloomberg's Global Commodity Index has dropped by around 1% since Trump's victory speech in the wee hours of Nov. 9, declining in concert with the greenback's rise. That's hammered emerging-market investment. ETF.com found that exchange-traded funds that focus on the sector saw more than $2 billion in outflows in the 10 days ended Nov. 14 as investors moved cash to higher-yielding (and riskless) U.S. Treasuries.
America now has 8.5% more purchasing power than it did six months ago, when the dollar traded at 92.59 against a global currency basket vs. 100.5 Wednesday. China's currency hit its lowest level since 2008 in Beijing trading on Wednesday, while the Mexican peso -- which had its biggest fall in 22 years after Trump's win -- is still hovering at record lows of 20.27 against the greenback.
Of course, emerging-market economies that rely on cheap manufacturing and export-led growth will happily devalue their currencies to make their goods more attractive to U.s. consumers. But an even deeper complication is the fact that these same economies -- China included -- will likely use the U.S. dollars that they get from exports to buy U.S. Treasury bonds that now pay some of the world's best rates. That will do little to wean America from its decades-long addiction to debt-fueled growth. It will also create enormous (and dangerous) imbalances in the global economy.
But perhaps most importantly for Trump, it won't help create the kind of jobs that he promised during the election campaign to bring back. Ever-growing imports simply weld Americans' spending habits to the unsustainable expectation of ever-cheaper consumer goods, crowding out "Made in America" products and holding down manufacturing-job growth in favor of those in the services sector.
The bottom line: Irrespective of the politics of globalization, it's clear that financial markets and trade-based economies are interconnected in ways that make binary promises like "more jobs" almost impossible to fulfill.
-- Written by Martin Baccardax