It is clear that President Trump pays a great deal of attention to the stock market. He has made numerous comments about the market over the last few years, and usually it is regarding how well it is doing. Personally, I like the fact that he is aware of what is going on in the market, being that I am involved in the industry through my writing.
I also think President Trump is trying to control the market to a degree with comments about trade negotiations and about the dollar being too strong, etc. Unfortunately, he is trying to control the uncontrollable. The market moves based on supply and demand, and the exchange rate of the dollar fluctuates based on supply and demand as well.
Over the weekend, President Trump made a comment about the dollar being too strong and that he didn’t like that. He made a few comments about Fed Chairman Powell that essentially blamed him for the strong dollar, but that isn’t entirely fair. The FOMC doesn’t control the exchange rate, only the reserve rates. In fact, I would argue that the exchange rate moves just as much due to fiscal policy as it does monetary policy—the White House and Congress set the tone for fiscal policy, not the Fed.
In addition to the comments about the dollar, there was another teaser comment about a deal between the U.S. and China being close. Unfortunately, I think investors have heard this too many times and have discounted the comments at this point. That’s the reason for the title of this article. I think the administration has used that statement too much and the idea of a deal has already been baked into the market. At this point, it looks like the market is looking for the next driving force that will lift the market.
After President Trump made the comments over the weekend, we saw stocks come under some selling pressure on Monday and again in the morning session on Tuesday and the dollar continued to strengthen against other currencies.
Frankly, the dollar is stronger because the U.S. economy is performing better than most other world economies. But even though the dollar has strengthened in the last year, it is far from being at an extreme high.
President Trump is right to worry about the dollar getting too strong, because it would hurt exports. The one thing he has been trying to do with the various trade deals is to increase exports or at the very least level the playing field between trading partners. If the dollar gets too strong, it would likely nullify the benefits of the trade deals he has been working on.
While he is right to worry about the dollar getting too strong, he might be pointing the blame in the wrong direction. In fact, there may not be any blame necessary. As long as the economy is performing well and inflation is in check, the dollar is likely to strengthen. Don’t we want the economy to perform well and don’t we want inflation to be held in check?
Another factor in the dollar strengthening is the current geopolitical environment. With England exiting the European Union, tensions between India and Pakistan, turmoil in Venezuela—the dollar is a safe haven and is in greater demand as a result. I would say it is a good thing that our currency is a safe haven as it means we are more stable than other countries.
It is also a good thing that the dollar is strong given how our deficit has increased in recent years. If we were an emerging economy, our debt to GDP ratio would be a major concern and would likely cause weakness in the currency.
I would also point out that based on the chart above, a rising dollar hasn’t hurt the stock market in the past. If you look at the period from 1995 through 2002, the dollar was rising sharply. The stock market moved sharply higher from 1995 through 2000 until the bear market hit. We also see that the dollar has been rising since 2011 and the market has been quite well since then as well. In the meantime, the dollar was weakening in the late 70’s, and the market wasn’t doing all that well.
I appreciate the fact that President Trump does keep a close eye on the stock market and the exchange rate, but I would suggest that he not try to control either of them. Focus on the health of the economy and the market will do just fine and the dollar will continue to be in demand. Both of those things are good in the long run.