With the depreciation of the US dollar, what strategies does Trump have? Tax increases, dealing with the Federal Reserve, Plaza Accord 2.0?

As Trump returns to the White House, investors and policy analysts are closely monitoring his policy moves to respond to the potentially radical "tricks" this new president may unleash.

Previously, Trump has repeatedly expressed dissatisfaction with a strong dollar, believing that a stronger dollar would harm the United States and negatively impact exports and manufacturing. He stated:

"I have been talking to manufacturers, and they say no one wants to buy our products because they are too expensive."

However, after Trump's victory, the main "Trump trade" in the market has been to go long on the dollar, betting on a stronger dollar. This is because people believe that Trump's economic policies will lead to high inflation, which will force the Federal Reserve to shelve interest rate cuts and boost the dollar. Under other conditions, higher tariffs would suppress overseas purchasing power and also raise exchange rates.

Analysts believe that Trump will take several measures to fulfill his idea of "dollar depreciation," such as raising taxes, dealing with the Federal Reserve, and implementing Plaza Accord 2.0...

Raising Taxes to Increase Import Costs

One obvious way to influence the dollar's exchange rate is to address the U.S. current account balance by adjusting import tariffs, export subsidies, or even taxes on foreign investments.

Analysts believe that given Trump's frequent expressions of love for tariffs, he is very likely to use several methods to influence the dollar's exchange rate:

By raising import costs through tariffs, reducing import volumes, decreasing demand for foreign traded goods, while increasing the competitiveness of domestic producers that may fill the demand, putting depreciation pressure on the dollar. In fact, such tariffs act like a tax on American consumers, increasing government revenue while reducing real income, which will lower domestic demand and increase savings, thereby adjusting the current account.

Foreign economies may attempt to lower the nominal exchange rate against the dollar to increase exporters' local currency income to offset some of the loss in export volume.

By providing subsidies to domestic producers to lower the prices of U.S. exports, making them more affordable for foreigners. This will lead to an increase in the U.S. federal budget deficit, but an increase in private savings may offset this deficit.

Analysts also point out that tariffs on imported goods will initially reduce real income in the U.S. However, this may trigger wage demands to compensate for lost income, necessitating tighter monetary policy, thereby pushing the dollar stronger while restoring real income.

Dealing with the Federal Reserve to Control Interest Rate Policy

During Trump's first term, he frequently criticized the Federal Reserve's interest rate hike policy and explicitly stated, "When Federal Reserve Chairman Powell's term ends in 2026, I will replace Powell." Analysts believe that if Trump really wants to depreciate the dollar, then taking over the Federal Reserve is an obvious method.

One way to do this is to gradually undermine the credibility of Federal Reserve officials and make them dovish, so they will follow Trump's low-interest rate path. Although this approach may weaken the Federal Reserve's independence, Trump may see it as a necessary means to achieve dollar depreciation In addition, Trump may also expel Federal Reserve officials who have not completed their terms and appoint officials whose policy positions align with his own.

Plaza Accord 2.0, Artificial Intervention in Dollar Depreciation

In the 1985 Plaza Accord, the United States coordinated actions with its major trading partners to successfully promote the depreciation of the dollar, and by the end of the 20th century, the dollar index had nearly halved from its peak in 1985.

Analysts believe that Trump may seek similar international cooperation, including U.S. fiscal consolidation (increasing domestic savings) and artificially appreciating the currencies of trading partners.

However, analysts also point out that the current international environment is different from that of the 1980s, as not most countries are suffering from prolonged inflation. Additionally, given the critical importance of trade to the economy, Europe, Japan, or other countries are unlikely to accept an artificial depreciation of the dollar. Moreover, Trump himself may not be very willing to do so, making the realization of a similar Plaza Accord even more difficult.

Tightening Policies to Control Deficits

Analysts believe that the Trump administration will adopt tight fiscal policies to control the massive budget deficit in the United States, which in turn will drag down economic growth, suppress inflation, and lower interest rates, ultimately leading to a depreciation of the dollar. Barclays foreign exchange analysts Lefteris Farmakis and Themistoklis Fiotakis stated:

“At first glance, fiscal tightening seems unrelated to the dollar. However, fiscal tightening policies can directly impact the dollar by slowing economic growth, lowering interest rates, and causing poor capital flows.”