Download Will Trump`s Dollar Dilemma Lead to Tariffs?

ECONOMICINSIGHTS
WillTrump’sDollarDilemmaLeadtoTariffs?
February10,2017
ZaneE.Brown
Partner,FixedIncomeStrategist
378Views
TheU.S.presidenthasexpressedconcernsaboutastrongdollar,buthisgrowth
initiativescouldbolsterthegreenbackversusothercurrencies.
InBrief
PresidentDonaldTrump’sconcernsabouttheeffectofastrongU.S.dollaronU.S.
competitivenessstandatoddswithhisproposedgrowthagenda,whichcouldsupporta
strongerU.S.currency.
Dollarstrengthseemsalikelyoutcomeof pro-growthpolicies,creatingheadwindsf orexportdependentcompanies,butamoref avorableenvironmentf orU.S.-centriccompanies.
If Trumpwishestocountertheef f ectsof dollarstrength,tarif f scouldemergeasapolicy
lever.SuchamovecouldresultinhigherU.S.inf lation,alongwithin-kindretaliationf romU.S.
tradingpartners.
Amorebroad-basedborder-taxadjustmentisanotheroptioncurrentlyunderdiscussioninthe
U.S.Congress.
Thekeytakeaway:Giventhecurrentuncertainty,closemonitoringofpolicydevelopments
andaflexibleapproachtoportfoliomanagementin2017maybenecessaryforinvestors.
WhileitremainstobeseenhowPresidentDonaldTrump’spro-growthpolicieswillbedesigned,
whethertheywillbepassedbytheU.S.Congress,andwhentheymaybeimplemented,any
successf uloutcomesf romthosepoliciessuggestsupportf ortheU.S.dollar.Trump’sconcernthat
astrongdollaris“killingus,”intermsof U.S.competitiveness,standsinstarkcontrasttohis
proposedgrowthagendaof inf rastructurespending,reducedtaxes,andlessregulation,which
independentlyandcollectivelybolsteramorerobustU.S.currency.
Trump’swishlistmayincludeaweakU.S.dollar,inadditiontopreviouslystateditemssuchasa
moreattractiveinvestmentenvironment,meaningf uljobgrowth,andastrongereconomy.But
globalcurrencymarketsseempoisedtoremindhimthatcurrencyvaluationmaynotbeathis
discretion.If Trumpbelievesitnecessarytocountertheef f ectsof dollarstrength,tarif f scould
emergeasapolicylever—butwithsignif icantconsequences.
PersistentU.S.economicgrowthandlessaccommodativemonetarypolicyledtoincreasedglobal
interestintheU.S.dollarevenbef oreTrumpannouncedhiscandidacyinJune2015.TheU.S.
1
DollarIndex(DXY),whichtracksthecurrencyagainstabasketof itsglobalcounterparts,rose
morethan20%,f rom80inmid-2014toanaverageof 97f or2015,thesamelevelthatpreceded
Trump’selectioninNovember2016.Sincehiselection,theindexhasrisenanother3.7%,to100.6,
asof February9,2017,accordingtoBloomberg,inanticipationthatpro-growthpolicieslikely
wouldproduceapro-dollarenvironment.
DollarBoost?
Althoughpolicydetailsarestilllacking,proposedinf rastructurespending,taxref orm,andreduced
regulationsuggestamorevigorousU.S.economyandanattractiveinvestmentenvironment.A
strongerU.S.currencyisanexpressionof investorinterestinsuchanimprovedenvironment.
Higherinterestratesassociatedwithabettereconomicgrowthalsoservetoattractinvestor
interest.SuchanenvironmentalsoshouldenabletheU.SFederalReserve(Fed)tohikeshort-term
ratesasitpursuesratenormalization,therebyattractingstillotherinvestorsandprovidingf urther
supporttothedollar.
Sincehisinauguration,Trump’smeetingsandexecutiveordershaveunderscoredhis“America
First”theme,athemethatmightalsobeinterpretedas“dollarf irst.”Whenhemetwith
manuf acturersonhisf irstdayinof f ice,f orexample,hedirectedthemtoreturnin60dayswith
suggestedchangesthatwouldenablef asterdevelopmentof manuf acturingplantsandjobs.He
promisedadvantagestocompaniesthatmaketheirproductsintheUnitedStates.Hisorderto
withdrawtheUnitedStatesf romtheTrans-Pacif icPartnership(TPP)tradepactwith11Asian
nations(neverratif iedbyCongress)wasinterpretedbycurrencymarketsasunf avorabletoother
participatingcountries,particularlyVietnam.Presidentialorderstopursuedevelopmentof theXL
andDakotapipelines,usingexclusivelyAmerican-madesteelpipe,suggestregulatorychangeswill
f avoreconomicgrowthandef f iciency.
Opportunitiesandbenef itsof apro-growthenvironmentwerenotlostonsomeglobal
manuf acturers.ElectroniccomponentmakerFoxconnexpressedinterestininvestingUS$7billion
tobuildaf lat-paneldisplaymanuf acturingplantintheUnitedStates,potentiallycreating40,000
jobs.Meanwhile,Toyotaannouncedplanstoinvest$10billionintheUnitedStatesoverf iveyears.
PotentialU.S.corporatetaxref ormalsopromotesabusiness-f riendlyenvironmentandrelated
currencystrength.Repatriationsof f oreigncashasaresultof lowerdomestictaxescouldalso
f urtherstrengthenthedollar.
Trump’sDilemma
Trump’spoliciesseemtopromotethedollarstrengththathedescribedasdamagingtoU.S.
corporatecompetitivenessinarecentinterviewwithTheWallStreetJournal.Hiscommentsdid
nottouchonthef actthathispref erredpoliciesmayactuallyf urthersupportthegreenback.ProgrowthinitiativesandpresidentialdirectivesthatcreatejobsandstrengthentheU.S.economyalso
createandstrengthendemandf ortheU.S.dollar.Thereinlaytheseedsof apotentialdilemmaf or
Trump’sgrowthprogram.
Thedilemmaunf oldswhenastrongerdollarincreasesthecostof U.S.exports,reducingprof it
marginsand/ormarketshareof U.S.multinationalcompanies.Earningsof U.S.multinationals
f urthersuf f erasf oreignrevenuestranslateintof ewer,strongerdollars.Dollarstrengthalso
createscheaperimportsthatcanaf f ectdemandf orU.S.producedgoods,potentiallyreducing
U.S.production,growth,andjobs.
WhileTrumpmaypref erlessdollarstrength—becauseamorerichlyvaluedU.S.currencycould
impedehissprinttowardf astereconomicgrowthandmoremanuf acturingjobs—hemayhaveto
acceptastrongercurrencyasaconsequenceof successf ulf iscalpolicies.
TariffSolution?
Meanwhile,anunwillingnesstoaccepttheimpactof dollarstrengthcouldleadtothe
implementationof otherpoliciescurrentlyunderconsiderationinWashington.Tocompeteagainst
cheapimports,tarif f scouldbeleviedagainstgoodsimportedf romcertainnations.Tarif f swould
2
increasethecostof imports,of f settingthecheapeningef f ectof dollarstrengthandpermittinga
moref avorableenvironmentf ordomesticproducers.Suchactionsincluderiskof several
consequences,includinghigherdomesticinf lationandpotentialretaliationbyothercountries,
similartotheaf termathof theSmoot-HawleyTarif f Actof 1930(Smoot-Hawley).*Economic
historyandtheorybothconveythattarif f smay,ultimately,leadtoevengreaterdollarstrength.
Amorebroad-basedborder-taxadjustmentisanotheroptioncurrentlyunderdiscussionbyU.S.
HousemajorityleaderPaulRyan(R-WI)andU.S.SenatemajorityleaderMitchMcConnell(R-KY).
Suchapropositionis,inef f ect,ataxonimportsandataxcreditf orexports,andalsoseemsto
addressconcernsof exportersaswellasdomesticproducers.However,a“tax”onimportsof
apparel,oil,autos,andautopartssuggestsinf lationaryconsequencesatthemostbasiclevelsof
consumption,resultinginsomeimpairmentineconomicgrowthaswell.Taxcreditstoexporters
wouldtemporarilyputthemonmoreleveltermswithcompetingcompaniesthatenjoyacurrency
advantage,butretaliationbytarif f -hitnations—againstwhatmaybeperceivedasanunf air
advantagef ortheUnitedStates—maybealikelyresponse.
Detailsof tarif f sandborder-taxadjustmentshaveyettobeidentif ied;anef f ectivesolutionmayin
themaking.However,untilsuchadevelopment,dollarstrengthseemsalikelyoutcomeof progrowthpolicies,creatingheadwindsf orexport-dependentcompanies,butamoref avorable
environmentf orU.S.-centriccompanies.If tarif f sbecomepolicy,dif f erentinvestmentopportunities
willunf old.Giventhecurrentuncertainty,closemonitoringof policydevelopmentsinWashington
andthecapitalsof othermajorglobaleconomies,andaflexibleapproachtoportfolio
managementin2017,maybenecessaryconditionsf orattractivereturns.
*TheSmoot-HawleyTarif f Act,f ormallytheUnitedStatesTarif f Actof 1930,alsocalledHawleySmootTarif f Act,wasapieceof U.S.legislation(signedintolawJune17,1930)thatraisedimport
dutiestoprotectAmericanbusinessesandf armers,addingconsiderablestraintotheinternational
economicclimateof theGreatDepression.
Thiscommentarymaycontainassumptionsthatare“f orward-lookingstatements,”whicharebasedoncertain
assumptionsof f utureevents.Actualeventsaredif f iculttopredictandmaydif f erf romthoseassumed.Therecanbe
noassurancethatf orward-lookingstatementswillmaterializeorthatactualreturnsorresultswillnotbematerially
dif f erentf romthosedescribedhere.
Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwillf luctuate.Thereis
noguaranteethatmarketswillperf orminasimilarmannerundersimilarconditionsinthef uture.
Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithoutnotice.
Projectionsshouldnotbeconsideredaguarantee.
Theopinionsintheprecedingeconomiccommentaryareasofthedateofpublicationandaresubjecttochange.Additionally,
theopinionsmaynotrepresenttheopinionsofthefirmasawhole.Thedocumentisnotintendedforuseasforecast,
researchorinvestmentadviceconcerninganyparticularinvestmentorthemarketsingeneral,anditisnotintendedtobe
legaladviceortaxadvice.ThisdocumentispreparedbasedoninformationLordAbbettdeemsreliable;however,Lord
Abbettdoesnotwarranttheaccuracyandcompletenessoftheinformation.
3
Investorsshouldcarefullyconsidertheinvestmentobjectives,risks,chargesandexpensesof
theLordAbbettFunds.Thisandotherimportantinformationiscontainedinthefund's
summaryprospectusand/orprospectus.Toobtainaprospectusorsummaryprospectusonany
LordAbbettmutualfund,youcanclickhereorcontactyourinvestmentprofessionalorLord
AbbettDistributorLLCat888-522-2388.Readtheprospectuscarefullybeforeyouinvestor
sendmoney.
NotFDIC-Insured.Maylosevalue.Notguaranteedbyanybank.Copyright©2017Lord,Abbett&
Co.LLC.Allrightsreserved.LordAbbettmutualfundsaredistributedbyLordAbbett
DistributorLLC.ForU.S.residentsonly.
Theinformationprovidedisnotdirectedatanyinvestororcategoryofinvestorsandis
providedsolelyasgeneralinformationaboutLordAbbett’sproductsandservicesandto
otherwiseprovidegeneralinvestmenteducation.Noneoftheinformationprovidedshouldbe
regardedasasuggestiontoengageinorrefrainfromanyinvestment-relatedcourseofaction
asneitherLordAbbettnoritsaffiliatesareundertakingtoprovideimpartialinvestmentadvice,
actasanimpartialadviser,orgiveadviceinafiduciarycapacity.Ifyouareanindividual
retirementinvestor,contactyourfinancialadvisororotherfiduciaryaboutwhetheranygiven
investmentidea,strategy,productorservicemaybeappropriateforyourcircumstances.
4