Forex furor Trump Sets Eyes on Currency

U.S. President-elect Donald Trump is concerned about the appreciation of the U.S. dollar and now, market observers fear a currency war.
A strong U.S. dollar could thwart plans by President-elect Donald Trump to boost the country's competitiveness.

The message could not have been clearer: "Our currency is too strong. And it's killing us,” U.S. President-elect Donald Trump told the Wall Street Journal in an interview on Monday.

His remarks seem to highlight the contradictions in his policy proposals. While Mr. Trump plans to “Make America Great Again” and strengthen the U.S. economy, this in turn draws more capital to the United States and the dollar exchange rate rises as a result. At the same time, a stronger dollar makes exports by U.S. companies more expensive, making the country less competitive on the global market and hampering Mr. Trump’s plan.

But strategists at major investment banks say the dollar to will strong. They expect the world's most important currency pair by sales, the euro and the U.S. dollar, will reach a one-to-one exchange rate during the course of the year. Recently, though, the dollar has fallen slightly to a rate of $1.068 per euro.

With markets on edge about the uncertainty under his presidency, Mr. Trump seems to want to shape developments with his remarks. Experts note that Mr. Trump’s statements mark a change from past administrations who have all refrained from talking the dollar up or down.

“This is the first time we have a president-elect say the dollar has gone too far,” Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman told U.S. broadcaster CNBC. “He's saying things and doing things that no president has ever done before."

We haven’t seen anything yet. If the president of the United States begins talking the dollar down then we will have currency wars. Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman

“We haven’t seen anything yet. If the president of the United States starts talking the dollar down then we will have currency wars and it will make a mockery of the previous things that we thought were wars,” Mr. Chandler said.

Countries would try to buy themselves a competitive advantage by weakening their currencies. They are able to do so by flooding the market with their currency through central banks.

Another boost to the dollar could come from a comprehensive tax reform like the border adjustment tax proposed by the U.S. Congress. The idea was to remove taxes on U.S. exports and introduce a 20-percent import tax rate for goods at the U.S. border. Some currency experts said this could lead to a sharp appreciation of the dollar, by as much as 25 percent. In his interview with the Wall Street Journal, Mr. Trump shot down the draft law, calling the plan “too complicated” to enact.

19 p34 Unwanted Strength-01

One country of particular concern for the incoming U.S. president is China. The strong dollar means it is harder for U.S. companies to compete with rivals from Far East, Mr. Trump said and suggested that he wanted to see iPhones, now assembled in China, to be produced in the United States.

Considering the uncertainties surrounding a Trump presidency, economists' predictions vary widely. While some expect parity between the euro and the dollar in the long term, experts at DZ Bank anticipate a rate of $1.10 per euro by the end of the year. Holger Schmieding, chief economist at Berenberg Bank, called the U.S. currency "strongly overvalued at the moment." Considering its purchasing power, a rate of about $1.25 per euro would be appropriate, he said.

Many European companies would likely suffer under such a significant devaluation. In light of widespread globalization, a weak dollar is a burden on many German companies in the long run, said equities strategist Markus Wallner of Commerzbank. If the U.S. currency rises and the euro falls, a company like BMW would have to consider lowering the price of its cars to remain competitive in the United States. As a rule, companies try to avoid lowering prices, preferring to accept a lower net profit. Such calculations remain theoretical however, as many international corporations hedge their foreign currency transactions.

In Germany, where many companies depend on exports, a weak dollar would be a burden in the long run.

Nevertheless, a low dollar is generally a burden in the long run, especially in Germany, where many companies listed in the blue-chip DAX or the mid-cap MDAX index depend on exports.

If the euro remains high, the biggest losers would include healthcare group Fresenius and its subsidiary Fresenius Medical, which generates about two thirds of its revenue in the United States, according to Commerzbank’s Mr. Wallner.  If the euro gains 5 percent in value, the additional operating profit at Fresenius, that is, earnings before interest, taxes and depreciation (EBITD), would fall by 8 percent in the current year. Compared to the company’s 2015 results, this would mean a €316 million drop in earnings. The group, based near Frankfurt, makes more than 50 percent of its sales in North America and Asia in dollars.

Another loser would be Munich-based semiconductor firm Infineon, where a 5-percent fall in the value of the dollar would also reduce earnings by 8 percent, Mr. Wallner said. The same devaluation would cause earnings to drop by 6 percent at tire maker Continental and by 5 percent at BMW.

In the short term at least, experts predict Mr. Trump will achieve his goals. Felix Zulauf, the well-known investor and former hedge fund manager, expects the dollar will fall in the coming 6 to 10 weeks but will pick up again after that.

On the other hand, relations with the United States are likely to stay volatile. "I expect spats and problems in the U.S.-European relationship, along with trade conflicts," Mr. Zulauf said at an investor conference in Zurich.

But even Mr. Trump is unlikely to want a trade war. "It probably wouldn't be long before other nations hit back with countermeasures. There would be no winners in the end, only losers," said foreign currency analyst Sören Hettler of DZ Bank.

But barring intervention by Mr. Trump, many indications point to a strong dollar. Besides Mr. Trump’s economic policy, the U.S. Central Bank raised interest rates under Fed Chair Janet Yellen in December 2016. Higher interest rates raise the value of a currency, making exports less competitive and reducing aggregate demand in the economy. And Ms. Yellen and other central bankers expect two to three further rate hikes this year.


Robert Landgraf is the chief correspondent for the financial markets and is based in Frankfurt, Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt and Frank Wiebe is a New York correspondent for Handelsblatt, focusing on finance policy. Additional reporting by Ingo Narat. To contact the authors: [email protected] , [email protected] and [email protected]