Donald Trump likes to argue – especially with himself. To study that unique character trait, all one needs to do is peruse the @realdonaldtrump Twitter feed.
At 6am, the U.S. president might be slamming Chinese leader Xi Jinping, calling for gun control or demanding the jailing of some political opponent. By noon, he will have reversed his earlier rants. By 6pm, he’s likely to go full circle again.
Markets are experiencing a similar whiplash as Trump hires dollar bull Larry Kudlow to head the National Economic Council. The economist is such a free-trade enthusiast that he’s long referred to “King dollar,” his catch-all phrase for how a rising currency speaks to economic strength and credibility.
I met with Kudlow often during my Washington days from the mid-1990s into the early 2000s. Back then, the supply-sider had very few kind words for then-president Bill Clinton. That is, except for the strong-dollar policy.
But with Trump tapping Kudlow to replace Gary Cohn, it suggests the President is having a new internal argument.
Asian economists: Buckle your seatbelts
Might it spill over into Asia markets? It could indeed, as Trump oscillates from weak-dollar position to strong-dollar stance, perhaps all in the same day.
In 1971, then-U.S. Treasury Secretary John Connally famously said: “It’s our currency, but it’s your problem.” Trump’s Treasury secretary, Steven Mnuchin, said as much in January, ending a 23-year-old strong-dollar preference that Kudlow will be championing in the White House. On his CNBC talk show Wednesday, Kudlow offered a trading recommendation: “I would buy King Dollar and I would sell gold.”
What do you do with that if you’re Taro Aso, Japan’s finance minister? The yen, after all, bore the brunt of Trump’s dollar-policy U-turn, rallying nearly 6% this year. How about South Korean Finance Minister Kim Dong-yeon, who saw the won surge 13% in 2017?
In Beijing, the next People’s Bank of China governor, to be named any moment now, faces a Trumpian baptism by fire as the dollar dances to different tunes on different days.
All Asian policymakers can do, as Trump loves to say, is “see what happens.” Add in the wildcard of new Federal Reserve Chairman Jerome Powell, who’s telegraphing four tightening moves this year. Might we see a Powell-Kudlow divide between the Trump-Mnuchin dollar preference? It’s impossible to know, and that’s exactly the problem for Asia’s export-reliant economies.
‘Uncertainty the order of the day’
In an op-ed for Project Syndicate, currency expert Barry Eichengreen explores more than a dozen narratives for why the dollar might be sliding, including fiscal irresponsibility. But the University of California, Berkeley, economist takes an “Occam’s razor” view that the simplest explanation is typically best. Most excuses, he writes, “overlook the most plausible explanation, which is Trump-related uncertainty.”
Investors, Eichengreen argues, “have no way to forecast the impact of policies, because policies thought to be headed one way suddenly veer in the opposite direction. A big infrastructure bill turns out to be small. Withdrawal from the Trans-Pacific Partnership trade agreement turns into a possible decision to re-enter TPP.” And then Mnuchin, he says, “seemingly abandons the strong-dollar policy but then re-embraces it. Uncertainty is the order of the day, every day.”
And now Trump has a new voice in his head. Trump goes way back with Kudlow, the one-time Bear Stearns chief economist. Kudlow is a Reaganite, subscribing to its gospel of low taxes, low inflation and free trade. His heyday on Wall Street, the 1980s, is a period Trump views with deep nostalgia. That was back when Group of Seven powers could snap their fingers and bend markets to their will. That was when China barely mattered, when coal was a vital commodity and the world seemed America’s for the taking.
Currency markets are dabbling in their nostalgia – for a White House that had a clear position on the dollar and trade. Instead, they’ve gotten a bull market in policy schizophrenia. As another voice enters the fray – and Trump’s head – Asia had best buckle its seatbelts.