Tag Archives: world economy

After tariffs, what’s Trump’s next Move? Watch out US dollar weakening

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As the dust begins to settle down on President Donald Trump’s latest tariffs, speculation is growing over his next move. With the dollar as the world’s reserve currency, Trump has powerful tools to pressure allies—credit access, dollar funding, and payment systems, which may be wielded as powerful weapons to subject compliance from foes and allies together.

Deploying these weapons would carry major risks for the U.S. economy and could backfire, but some experts warn they remain on the table if tariffs fail to cut the trade deficit. A weakening US dollar can have wide-ranging effects across global markets, businesses, and consumers. When the dollar loses value against other currencies, imported goods become more expensive for American consumers, increasing the cost of electronics, automobiles, and household products. Inflationary pressures may also rise as businesses pass on higher costs, eroding purchasing power.

On the other hand, a weaker dollar benefits US exporters by making American goods and services more affordable for foreign buyers. This can boost demand for US-made products, potentially leading to increased revenues for companies with international markets. Sectors like manufacturing, agriculture, and tourism often see gains as foreign customers find US goods and destinations more cost-effective.

“I could well imagine Trump getting frustrated and trying to implement wacky ideas, even if the logic isn’t there,” Barry Eichengreen, economics professor at UC Berkeley, told Reuters.

The administration’s apparent goal is to weaken the dollar to rebalance trade, potentially through a Mar-a-Lago Accord—a nod to the 1985 Plaza Accord and Trump’s Florida resort.

Stephen Miran, a Trump adviser, has suggested the U.S. could pressure foreign central banks to strengthen their currencies by leveraging tariffs and security commitments. But analysts say such a deal is unlikely, as higher interest rates would risk recession in Europe and Japan, and China needs a weaker yuan to revive growth.

If currency talks fail, Trump could take more extreme measures, such as restricting foreign access to dollar liquidity. Cutting off Federal Reserve swap lines—vital for global banks in times of crisis—could roil financial markets and hit European, Japanese, and British lenders hardest. Investors and financial markets also react to a weakening dollar in various ways.

US-based investors with holdings in foreign assets may see gains as those investments appreciate in dollar terms. Conversely, foreign investors holding US assets could experience lower returns if the dollar depreciates. The currency’s decline may also impact the bond market, as investors demand higher yields on US Treasury securities to compensate for currency risk.

Though the Fed controls these programs, Trump’s reshuffling of key financial regulators has raised concerns. “It’s no longer unthinkable that this could be used as a nuclear threat in negotiations,” said Spyros Andreopoulos of Thin Ice Macroeconomics.

But such a move could ultimately weaken the dollar’s status as the world’s dominant currency.

Commodity prices often respond significantly to dollar fluctuations. Since key commodities such as oil and gold are priced in US dollars, a weaker dollar generally pushes their prices higher. This can lead to increased costs for businesses that rely on raw materials, further fueling inflationary trends. On the flip side, commodity-producing countries may benefit from stronger revenues as the prices of their exports rise.

Another pressure point is the U.S. payments industry. Visa (V.N) and Mastercard (MA.N) process two-thirds of card transactions in the eurozone. While China and Japan have developed alternatives, Europe remains reliant on U.S. payment networks.

If the White House pressured these firms to cut off services—similar to actions taken against Russia—European consumers would be forced to rely on cash or slow bank transfers. “A hostile U.S. is a huge setback,” said Maria Demertzis of the Conference Board think tank. International trade dynamics can shift as countries reassess their economic strategies in response to currency fluctuations.

Ultimately, a weaker dollar carries both advantages and disadvantages depending on one’s perspective. While US manufacturers and exporters may enjoy competitive benefits, consumers and businesses reliant on imports could face higher costs. Investors must navigate currency risks carefully, and policymakers must balance economic growth with inflation control. The dollar’s movements influence economies worldwide, making its strength or weakness a critical factor in global financial stability.

Weakening Dollar

A weakening US dollar can have wide-ranging effects across global markets, businesses, and consumers. When the dollar loses value against other currencies, imported goods become more expensive for American consumers. Precisely because it takes more dollars to buy the same amount of foreign currency, raising the cost of imported electronics, automobiles, and everyday household products. Inflationary pressures may also increase as businesses pass higher costs on to consumers, reducing purchasing power.

On the other hand, a weaker dollar benefits US exporters by making American goods and services more affordable for foreign buyers. This can boost demand for US-made products, potentially leading to increased revenues for companies with international markets. Sectors like manufacturing, agriculture, and tourism often see gains as foreign customers find US goods and destinations more cost-effective.

Investors and financial markets also react to a weakening dollar in various ways. US-based investors with holdings in foreign assets may see gains as those investments appreciate in dollar terms. Conversely, foreign investors holding US assets could experience lower returns if the dollar depreciates. The currency’s decline may also impact the bond market, as investors demand higher yields on US Treasury securities to compensate for currency risk.

Commodity prices often respond significantly to dollar fluctuations. Since key commodities such as oil and gold are priced in US dollars, a weaker dollar generally pushes their prices higher. This can lead to increased costs for businesses that rely on raw materials, further fueling inflationary trends. On the flip side, commodity-producing countries may benefit from stronger revenues as the prices of their exports rise.

Government policies may force the Federal Reserve respond by adjusting interest rates to stabilize the currency and control inflation. Meanwhile, other central banks might intervene in currency markets to prevent excessive volatility. International trade dynamics can shift as countries reassess their economic strategies in response to currency fluctuations.

 

IMF Sees Subdued Growth, Warns of Stagnation, Rise in Protectionism

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With global growth subpar at 3.1% in 2016, with slight increase to 3.4% next year, persistent stagnation in advanced economies could further fuel anti-trade sentiment with calls for protectionism in developed economies, said IMF in its latest outllok that may send warning bells to India and China.

Global economic growth will remain subdued this year following a slowdown in the United States and Britain’s vote to leave the European Union, the IMF said in its October 2016 World Economic Outlook.

Growth in emerging Asia, and especially India, continues to be resilient, it said. India’s gross domestic product is projected to expand 7.6% this year and next, the fastest pace among the world’s major economies. The IMF urged India to continue reform of its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education, and health care.

On global economy, IMF chief economist Maurice Obstfeld said: “We have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world."

The 2016 report highlighted the precarious nature of the recovery in 8 years after the global financial crisis. It raised the specter that persistent stagnation, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration. Obstfeld said such restrictions would hamper productivity, growth, and innovation.

"It is vitally important to defend the prospects for increasing trade integration," Obstfeld, said. “Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”

To support growth in the near term, the central banks in advanced economies should maintain easy monetary policies, spend more on education, technology, and infrastructure, counteract waning potential growth through structural reforms and reduce barriers to market entry, IMF said.

The world economy will expand 3.1% this year, the IMF said, unchanged from its July projection. Next year, growth will increase slightly to 3.4% on the back of recoveries in major emerging market nations, including Russia and Brazil.

Advanced economies will expand just 1.6 %in 2016, less than last year’s 2.1 %pace and down from the July forecast of 1.8 percent.

The IMF marked down its forecast for the United States this year to 1.6 percent, from 2.2% in July, following a disappointing first half caused by weak business investment and diminishing pace of stockpiles of goods. U.S. growth is likely to pick up to 2.2% next year as the drag from lower energy prices and dollar strength fades.

Further increases in the Federal Reserve’s policy rate “should be gradual and tied to clear signs that wages and prices are firming durably,” the IMF said.

Uncertainty following the “Brexit’’ referendum in June will take a toll on the confidence of investors. U.K. growth is predicted to slow to 1.8 % this year and to 1.1%in 2017, down from 2.2% last year.

The euro area will expand 1.7%this year and 1.5% next year, compared with 2% growth in 2015.

“The European Central Bank should maintain its current appropriately accommodative stance,” the IMF said. “Additional easing through expanded asset purchases may be needed if inflation fails to pick up.”

Growth in Japan, the world’s number 3 economy, is expected to remain subdued at 0.5% this year and 0.6% in 2017. In the near term, government spending and easy monetary policy will support growth; in the medium term, Japan’s economy will be hampered by a shrinking population.

In emerging market and developing economies, growth will accelerate for the first time in six years, to 4.2 percent, slightly higher than the July forecast of 4.1 percent. Next year, emerging economies are expected to grow 4.6 percent.

In China, policymakers will continue to shift the economy away from its reliance on investment and industry toward consumption and services, a policy that is expected to slow growth in the short term while building the foundations for a more sustainable long-term expansion. Still, China’s government should take steps to rein in credit that is “increasing at a dangerous pace’’ and cut off support to unviable state-owned enterprises, “accepting the associated slower GDP growth,” the IMF said.

China’s economy, the world’s second largest, is forecast to expand 6.6 %this year and 6.2% in 2017, down from growth of 6.9 % last year.

“External financial conditions and the outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy,’’ the IMF said.

Sub-Saharan Africa’s largest economies continue to struggle with lower commodity revenues, weighing on growth in the region. Nigeria’s economy is forecast to shrink 1.7 %in 2016, and South Africa’s will barely expand. By contrast, several of the region’s non-commodity exporters, including Côte d’Ivoire, Ethiopia, Kenya, and Senegal, are expected to continue to grow at a robust pace of more than 5 %this year.

Economic activity slowed in Latin America, as several countries are mired in recession, with recovery expected to take hold in 2017. Venezuela’s output is forecast to plunge 10 %this year and shrink another 4.5 %in 2017. Brazil will see a contraction of 3.3 %this year, but is expected to grow at 0.5 %in 2017, on the assumption of declining political and policy uncertainty and the waning effects of past economic shocks.

Countries in the Middle East are still confronting challenging conditions from subdued oil prices, as well as civil conflict and terrorism.