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  • Writer's pictureRichard Murff

A Strong Dollar Smile

So what's wrong with a strong currency?

A strong dollar

If the goal is a weak currency to prop up exports, then the greenback has put the US in a no-win situation. The economy is still popping and investors have thrown in the towel on the hope that the Fed will cut rates by the end of the year. So, of course, everyone is piling into the dollar, driving it up 4% since the start of the year. There is no reason not to think that it won’t go up further. Outflows of currency from China amounted to $39bn in March – and that yuan isn’t heading into the Brazilian real.

A strong dollar does raise the cost of American exports and makes foreign imports cheaper, the critics aren’t wrong about that. Ultimately though, this may be a bigger problem for the two wind-bags gunning for the White House than will be for the economy. Biden wants to ignite US manufacturing and can’t quite persuade the public to let him hold the match. A strong dollar leads to a trade deficit, which is one of the few things that  Trump has been consistently howling against for decades. Both are short-sighted. And both candidates have spent the last seven years griping about the other’s asinine foreign trade policy – throwing up trade barriers, and picking fights with valuable trading partners and allies – then extending them. Trade disputes do much more harm to an economy than a strong currency.

Still, Team Trump is saying that it wants to weaken the dollar, but practically there isn’t much to be done about it. In an election year, though, it’s no good pointing this out.


Stephen Jen of Eurizon SLJ invented the “dollar smile” theory, which runs that when the US is plowing ahead of the world economically, the dollar is strengthened as investors pour into greenbacks and US bonds. Which is what is happening right now - the US economy is 8% larger than it was before the Covid lockdowns. For their part, the UK, France and Germany are only up about 2% for the same period. For its part, China is a real train-wreck – yuan has fallen 2% against the greenback this year.

On the other hand, when the US economy is off-kilter it is a drag on the global economy. Paradoxically, this causes a “flight to safety” among the world’s investors and nothing is perceived as safer than the US Treasury for the simple reason that, as it now stands, nothing is.

The only way to get a weak greenback is to hit it somewhere in the middle of the smile, call it “the porridge Goldilocks ate.”  This would take loads of governments currently holding dollars as foreign currency reserve to sell them off to prop up their currencies. Which is pretty unlikely.


So we’re stuck for the time being with a strong economy and robust currency. Which is probably not the problem critics make it out to be. A strong dollar basically means that a small pile of US dollars can buy a larger pile of foreign currency. But we don’t want foreign currency, and to look at the way that foreigners are piling in the greenback, neither do they. We want foreign stuff. So we’ll have a trade deficit. What the politicians and their balance of trade arguments fail to grasp is that when US dollars go abroad, US markets get goods in return, and when the dollar is as strong as it is, we get a heaps of cheap goods. Which we then sell to each other, or make into something of higher value; either way, we make more money. In this case American money, which, as we’ve noted, can buy a lot of cheap inputs.  

As a case study, the US had a ferocious trade-deficit with Japan in the 1980’s when they buried us in cars and consumer electronics and took all our money. Look what happened to them. Thirty years later and we’ve got a sushi restaurant on every corner and the Japanese economy has only just now reached the size that it was in 1994.


None of which is going to stop the talking heads calling for tariffs and sanctions – sensible enough for rivals who have weaponized trade policy – but self-defeating when applied to allies, as it only shrinks the available markets.



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