President Trump’s tariffs have three goals: 1) create an economic situation that encourages investment in US production, allowing for the substitution of imports 2) encourage foreign companies to invest in the US 3) generate tax revenue. The first two have the goal of reducing the US trade deficit the US runs with many countries. The third generates much needed government revenue.
Recently, there was a legal setback on President Trump’s tariffs. Court rulings suspended the bulk of the proposed tariffs; the court ruled the overstepped the test of emergency authority.
As expected, the Trump administration claimed tariffs would go forth. And yes, there are ways tariffs can be implemented that would not be deemed executive branch “overstep”. A short-term law could be used allowing tariffs for 150 days. He could also go the traditional route of seeking congressional approval. It is hard to imagine President Trump has the patience to wait for congress, and 150 days may not be enough.
The other way to achieve an increase in demand for US produced goods and services, and stimulate foreign investment is lowering the value of the US dollar. A lower dollar lowers the price foreign companies pay for US goods, increasing the amount of US exports, and improving the trade deficit. A lower US dollar lowers the cost of investing in the US for foreign entities. A lower cost of investment would probably mean more investment in US projects.
In the end, more US goods are sold to foreigners, and more money comes in for investment. Two problems solved.
The third goal, to increase government revenue is tricky. There is a risk that the US debt limit (ceiling) will be reached soon, meaning unless there is a new ceiling put in place new US debt cannot be issued. Limited funds from tariffs and restrictions on borrowing is not a good combination.
Whether or not a lower dollar is used to make up for the lack of tariff impact, there are still reasons for the US dollar to go down. First, US rates have stayed high, and the US dollar has not gone up in value; if higher interest rates don’t boost the value of the US dollar, what will? Second, foreigners have increased their sales of US treasuries; in March the Chinese cut their exposure noticeably. If a foreign entity sells bonds, they also sell the currency. Finally, the chaotic US policy is holding foreign investment back; if there is no confidence in regulatory clarity, there is less investment
There are probably more reasons than these for the dollar to go down, but it’s a start.
The question is will there be a decline in the dollar or a devaluation. Although they sound similar, they are not. The dollar decline is slow and consistent. Devaluation is sudden and aggressive, often overshooting on the downside.
A steady decline in the US dollar is probably the best outcome. A devaluation is not. Devaluation has a tendency to spoil sentiment for a long time.
Whether it is a decline or devaluation, diversification away from the US dollar probably makes sense. If an investor owns US stable coin it is probably a good idea, if possible, to invest in Mexican stable, Brazilian stable, or Euro stable. Anything but US dollar stable.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
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