Key Points
- The president has a long history of defending a falling greenback as it makes American goods cheaper to sell abroad, which could especially benefit U.S. multinationals.
- However, it also signifies diminished confidence in the U.S. as foreign investors grow wary over the country’s fiscal outlook.
A weaker U.S. dollar isn’t concerning to President Donald Trump, but there is a key reason why it should be for investors. The dollar on Tuesday suffered its worst one-day slide since April after Trump declined to say that the greenback had fallen too much — as after the currency has slumped 10% over the past year. On Wednesday, it rebounded somewhat. Trump, who said “I think it’s great” when asked of the weaker dollar, has a long history of defending a falling greenback as it makes American goods cheaper to sell abroad. This could especially benefit U.S. multinationals. But it also signifies diminished confidence in the U.S. as foreign investors grow more wary over the country’s fiscal and economic outlook. “A weak dollar is not the weather, it’s the barometer,” Steve Englander, head of global G10 FX research at Standard Chartered, told CNBC. “It helps you in competitiveness in a narrow sort of way,” Englander said. “But if it reflects that investors are more concerned about your economy, more concerned about the range of policies that they see you might be implementing.” For one, a weaker dollar could hurt the Treasury market, raising the risk premium investors demand for holding onto bonds, and making it more expensive for the U.S. government to finance its massive federal deficit of $1.8 trillion as of fiscal year 2025. Ultimately, the chickens come home to roost head of global G10 FX research at Standard Chartered Steve Englander Fears of a ballooning U.S. deficit already appear to be showing up in the bond market. This month alone, the U.S. 10-year Treasury yield jumped above 4.25%, after starting the year around 4.16%. “If foreign investors believe that the dollar is about to enter a more sustained second leg down, they clearly will pull away from future Treasury purchases,” Peter Corey, chief market strategist at Pave Finance, wrote to CNBC. To be sure, there could be a floor to how weak the U.S. dollar can become. For one, Pave Finance’s Corey pointed out that the 10-year Treasury yield has been stuck in a range between 3.85% and 4.60%, and will become more of an issue if it goes over the “tripwire” that is above that range. For another, the dollar could attract buyers if other parts of the globe such as Europe or China start to show signs of economic weakness that make the U.S. greenback the “least objectionable” alternative, Corey said. A softening dollar also may not be troubling if productivity starts picking up. Standard Chartered’s Englander said he’s keeping a close eye on whether a ramp up in corporate productivity, and an expanding economy, will be enough to help the government keep pace with the deficit. “If we’re right that productivity growth is picking up, then GDP is going to pick up, federal government revenues are going to pick up, and the deficit picture won’t be as dire as it looks right now,” Englander said. “If we’re wrong, then we’re kind of in trouble, because we’re just another country that spends too much.” “Ultimately, the chickens come home to roost,” he added.
