Why the $’s rise may not be worth celebrating…for patriotic Americans
The dollar rose on news of Donald Trump’s win…spooking patriotic Americans with some knowledge of economics.
Here’s why.
It rose mainly because Mr Trump has promised to raise tariffs sharply, which would raise the price Americans pay for imported products, which would lift inflation, which would force the Federal Reserve to raise interest rates (or cut rates by less), which would mean higher interest rates on US debt.
Higher interest rates on US debt would attract global investors, raising the demand for dollars. Because traders expect that to happen, they aren’t waiting. They’re buying dollars now. It’s standard economics, as Olivier Jeanne and Jeongwon Son of Johns Hopkins University wrote in an economic working paper last month.
The reality of America’s situation is that it sells Treasury bonds and notes to fund some federal government spending. The annual interest rate that the US government pays on its debt obligations are treasury yields. This is the annual return investors can expect from holding a US government security with a given maturity. Treasury yields tend to rise when investors expect higher inflation and a rise in Federal Reserve interest rates. And higher yields also mean the government pays more to borrow.
It’s worth remembering that Bill Clinton had to abandon a high deficit spending plan because of a bonds sell-off. Even worse was the predicament of Britain’s Liz Truss, whose fledgling premiership ended when she unveiled a low-tax-high-spending budget in 2022.
Considering Mr Trump’s stated plans for his second presidential term involve fewer taxes and higher deficits (as well as threats to nudge the Fed away from its own, famously politically independent instincts on interest rates), we may yet see the dollar rise and rise and then fall, possibly in a way that sinks hearts, including those of patriotic Americans.
