What Pete was describing for months…
The Trump administration always emphasizes the cost to the U.S. of having its dollar serve as the world’s currency. But in exchange for all the dollars foreigners hold, the U.S. received goods and services from the rest of the world. Issuing paper IOUs in exchange for real goods and services — which most people would regard as a pretty good work if you can get it — economists call “seigniorage.” In a 2022
study, four U.S. economists estimated the cumulative value of U.S. seigniorage revenue at US$3.7 trillion.
In the furore around the on-again, off-again Trump tariffs, it sometimes gets lost that the international trade of goods has implications for international financial transactions and therefore for exchange rates, too. In general, a weaker currency makes a country’s imports more expensive and its exports cheaper. The U.S. dollar is down more than eight per cent since the beginning of the year against a basket of other currencies. Though Canada is on the front line in Donald Trump’s trade war the loonie is up more than three per cent against the U.S. dollar.
To boost exports, the U.S. may seek a repeat of 1980s' accords in which other countries agreed to keep their currencies expensive. Read more
financialpost.com
The United States has a large “current account” deficit. The current account tracks payments related to trade in goods and services, as well as direct transfers of money to other countries. The U.S. has a big surplus in services (which President Trump never talks about!) but its deficit in goods and its net transfer payments to other countries offset that. You can think of the U.S. current account deficit as money flowing out of the country.
But, as the saying goes, the balance of payment always balances. The U.S. finances its current account deficit either by borrowing from the rest of the world or depleting its stock of international reserves, such as gold. When it borrows, that brings money back into the country.
The exchange rate is determined in financial markets. Typically, a large current account deficit or the loss of international reserves leads to a weaker currency — though not always: many other factors determine a currency’s value, including expectations.
An added complication with the U.S. dollar is that it’s a “reserve currency,” i.e., widely held around the world because of its high liquidity, meaning just about everyone will take it, and the fact that most global financial transactions are either conducted in it or judged by dollar values. After decades of the dollar serving in this capacity, foreigners own $19 trillion of U.S. equities and $7 trillion of U.S. Treasury bonds and bills, roughly equivalent to the country’s GDP.
Around 54 per cent of all global export invoices are denominated in U.S. dollars, as well as 60 per cent of all international loans and deposits and 70 per cent of all new international bonds issued.
Because of its reserve currency status and great liquidity, global scurrying for safety at times of financial and economic stress often strengthens the dollar. But not this time. Why?
Could it be that Trump became President again & has been behaving like an unstable lunatic bully?
Investors may be catching on to the fact that the U.S. wants to lower the dollar’s value with the aim of reducing its deficits in trade and on the current account. And roller-coaster ups-and-downs in the announced scale and scope of tariffs may be eroding trust in U.S. policies, raising fears of inflation and reducing foreigners’ willingness to acquire U.S. assets.
Thus other countries’ currencies have risen against the U.S. dollar even though, like Canada, they’re being hit by tariffs. This counterintuitive rise may signal that, in the long run, the world may need another reserve currency, although it is not obvious what that would be, whether digital currencies or the Chinese yuan, if China made it more convertible.
The Trump administration seems to prefer bilateral negotiations to the multilateral scheme the world has followed since WWII, so it may want to negotiate exchange rates bilaterally, too.
The resulting uncertainty about currencies’ exchange value both with the U.S. dollar and with each other (so-called cross-exchanges) would give a whole new dimension to international capital flows. One consequence of even the possibility of this scenario happening is yet even more uncertainty about international trade and finance. Not a good outcome for the world economy or the United States.
