Palisade Research - Fri, Jul 20, 2018

"It Was Only A Matter of Time": Trump Sets His Sights on the Fed's Tightening and the Strong Dollar

image of a businessman straining while pulling down on a rope around a pulley holding a large gold coin with a dollar sign on it

Who says that the President doesn't - and shouldn't - pay attention to the U.S. Dollar's value?

Well - President Trump sure does. . .

Just look at his tweets from this morning. . .

image of a businessman straining while pulling down on a rope around a pulley holding a large gold coin with a dollar sign on it

This came just a few hours after Trump criticized the Federal Reserve's tightening path.

Trump went on to say during an interview with CNBC that he's "not thrilled" with the Fed's tightening - potentially slowing the economy.

"I don't like all of this work that we're putting into the economy and then I see rates going up," said Trump

His comments shocked many. There's a tradition - or rather a taboo - that the White House stays away from monetary policy.

But we should know better - Trump will always do what Trump wants.

And it's clear that what trump wants is a weaker dollar. . .

So far, the Fed's hiked rates five times since Trump entered office. And from what I can see, the economic growth cycle has peaked and now is heading downwards.

I've written that over the last 15 months - the U.S. economy has grown a bit. But that was all from a weakening dollar.

From January 2017 to February 2018 - the USD fell more than 14%. This greatly boosted exports and helped growth - not to mention the massive amount of debt the Treasury piled on and is trickled down into the economy.

But since March, there's been a massive short-covering rally for the dollar. And that fueled a reflexive short-term feedback loop into an even stronger dollar, all-while decimating Emerging Markets and commodities - basically anything that's anti-dollar.

Now the rapidly strengthening dollar is becoming a hinderance - especially when Trump has engaged the U.S. into a trade war with the second largest economy in the world - China.

Trump also told CNBC that he's "ready to go" up to $500 billion in trade tariffs on every single Chinese-made item that enters the U.S.

It's hard to see what else this would accomplish besides higher cost goods for consumers across the board. History has shown us that protectionist policies only keep inefficient and lower quality goods on shelves. . .

Trump's comments yesterday towards the Fed and their rate-hikes shouldn't be taken as a 'one-off' statement. For the U.S. to outlast China and Europe - and every country at that - the Fed will have to cheapen the dollar.

It's like watching a slow-motion train wreck - we can see everything unfolding in due time. And as I've always maintained - the Fed is only tightening so that they can cut rates later to stimulate the economy during a recession.

Otherwise said - the Fed's in a race between time and how much they can tighten before it triggers a recession. . .

Don't be surprised when Trump eventually calls for a weaker dollar. Because foreign countries - especially China - won't hesitate to cheapen their currencies so they get a trade advantage.

Trump will eventually realize that the dollar is the key to world trade - and he will weaponize it.

Then it's a race to the bottom for everyone. . .


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