If Mnuchin Wants A Weaker Dollar, Keep On With The Tariffs

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The bizarre economic contradictions coming out of the Trump Administration just keep piling on, rapid fire. The latest is out of Davos, where President Trump and his entourage, including Treasury Secretary Steve Mnuchin, have descended on the World Economic Forum in Switzerland with statements that are not exactly congruous.

Mnuchin, addressing the press during the event, said that a weaker dollar is “obviously good” in terms of trade and opportunities. Virtually in the same breath, he continued to say that “Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy.” One is left scratching one’s head wondering how to square these statements. A weaker dollar is obviously good, but only a stronger dollar is a reflection of the U.S. economic strength. It seems the U.S. economy can do no wrong, because either way the dollar goes, it’s good, obviously.

But that was just a contradiction of words. There was also a contradiction of action showing itself at Davos, and this one from Trump himself. On the one hand, Trump was quoted as saying, “I’m going to Davos. We’re going to be talking about investing in the United States again, for people to come and spend their money in the good ol’ USA.” Fair enough, but a day before he raised tariffs against foreign goods including solar panels and washing machines. This does not encourage foreign investment. If discourages it by telling foreign companies that their products are not welcome in the good ol’ USA.

But tariffs are certainly very consistent with a weak dollar policy. The tariffs will obviously discourage the purchase of foreign goods by Americans, which means that less dollars will be exported to foreign countries in exchange for their goods. The dollars that would have been exported will now stay within the U.S., increasing the domestic dollar supply and weakening the currency.

On the flipside, the amount of goods going into the U.S. will decline, meaning less goods will be available than otherwise with more dollars available than otherwise simultaneously. Prices will rise both from a goods supply-side and a dollar supply-side perspective.

If the Trump Administration really wants a weaker dollar, all they need to do is impose more tariffs. The more that are imposed, the weaker the dollar will become.

Even the companies that these tariffs are meant to protect from foreign competition will ultimately be hurt by them because there will be retaliatory tariffs against U.S. solar companies that will hurt their own future exports. Perhaps investors realize this, because the quick pop that solar stocks like First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR) had on the initial news of the tariff, have all quickly evaporated and solar stocks are broadly down today, one day after the announcement.

Trump and Co. may want to be careful what they wish for and even more careful of who they impose tariffs against. With the dollar index ETF (NYSEARCA:UUP) down a full percent today, it will be interesting to see at what point the Trump Administration changes its tune and roots for a stronger dollar, and not just in the long term.

 

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