After the results of the US election were announced, a series of 'Trump trades' undoubtedly achieved an epic victory on Wednesday this week. However, the sharp rise of the US dollar 'holds the sky up with a single pillar' in a single day may cause a significant trouble for Trump, who is still celebrating his election victory, as he needs to weigh the pros and cons of exchange rate appreciation and depreciation...

Trump's stance on exchange rate policy has always been 'want both' - wanting the benefits of a weak dollar (bullish for exports and domestic manufacturing), while also wanting to maintain the dominant position of the dollar globally (which requires stable or even increasing value of the dollar).

But as is well known, it's often difficult to have the best of both worlds!

It's like a contradiction. On one hand, Trump criticized exchange rate appreciation during his reelection campaign and worried about its negative impact on US manufacturing. On the other hand, he vowed to maintain the global dominance of the dollar and support policies recognized by economists and strategists that can increase the value of the dollar.

Currency markets on Wednesday clearly indicate: Is a weak dollar now a luxury?

So, in terms of urgency, between exchange rate depreciation and appreciation, which direction does Trump seem more eager to achieve? It seems like depreciation.

In June, Trump told Bloomberg Businessweek, 'We have a big currency problem,' the strength of the US dollar is a 'huge burden' for US companies. Vice President-elect Pence also advocates the benefits of a weak dollar.

But the sharp rise of the US dollar on Wednesday after Trump's victory seemed to devalue the dollar, almost becoming a goal that Trump was difficult to achieve.

The Bloomberg Dollar Spot Index recorded the largest single-day increase since 2020 on Wednesday. The ICE Dollar Index also surged by 200 points within a day, reaching above the 105 level. Investors familiar with the forex market may have an idea in mind: what a rare scene of such a single-day surge...

What is the logic behind the US dollar's sharp rise in a single day? Trump advocates raising tariffs, lowering taxes, restricting immigration, and relaxing regulations. This policy combination will inevitably lead to inflation, resulting in the Federal Reserve being more inclined to maintain interest rates at a high level, encouraging capital inflows into the US dollar.

In other words, without directly intervening in the foreign exchange market, if Trump wants to achieve the devaluation of the US dollar, he may have to give up imposing tariffs, give up tax cuts, give up cracking down on immigration, and give up relaxing regulations. With so many policies repeatedly promised by Trump on the other side of the 'balance', Trump himself may have no choice...

George Saravelos, the global head of foreign exchange research at Deutsche Bank, stated that if Trump's policy agenda is implemented, there is still a lot of room for the US dollar to rise.

What can Trump do?

So, when the US dollar's soaring trend moves further away from Trump's expectations of dollar devaluation, can Trump take other extreme measures to intervene and restrain the dollar from rising? For example, 'forcing' other economies to sign a currency treaty similar to the Plaza Accord?

It seems quite difficult to achieve this at the moment...

During his first term, Trump had criticized the appreciation of the usd as harmful to American manufacturers, but he did not take the most extreme measures, such as market intervention. Benson, a hedge fund manager who once provided economic advice to Trump's campaign team, said on Tuesday that he does not expect any public devaluation strategy.

One of the most obvious disadvantages of direct forex intervention is that it may further encourage other countries around the world to question the status and credibility of the usd at this sensitive juncture. Even before the election results are announced, nearly two-thirds of investment professionals surveyed by the American CFA Institute anticipate that the usd will to some extent lose its reserve currency status in the next five to fifteen years.

Currently, the BRICS club composed of Brazil, Russia, India, China, and South Africa is working on developing an independent cross-border payment system.

Similar to his desire for a devaluation of the usd, Trump has also emphasized multiple times that he wants to maintain the dominance of the usd. This year, he has threatened several times that if countries begin to abandon the usd in cross-border trade and finance, the USA will take tough measures. In the final weeks before the election, he even proposed punishing allies or opponents actively seeking bilateral currency trade instead of using the usd.

Trump hopes to impose huge tariffs on countries 'defecting' from the usd. In the new Republican platform released in July, maintaining the usd's status is listed as one of the 20 commitments. Trump has recently stated, "We will maintain the usd's position as the world's reserve currency - it is currently under severe threat."

Therefore, if the usd really surges under the influence of Trump's series of governing policies, Trump may not have many response actions he can take, and may even be powerless.

Benson once said that if Trump's proposed easing of regulations and expanding domestic energy supply lead to inflation rates falling to or below the Fed's 2% target, interest rates will drop, and you will see market-based devaluation of the usd. However, for this prediction to materialize, it clearly requires an "assumption" that inflation rates can indeed fall in the long term to the Fed's 2% target.

From a certain perspective, Trump's growing desire to intervene in Fed matters may also involve considerations on the exchange rate front.

Barclays strategists stated in a report in September that President Trump's other options include attempting fiscal restructuring (Trump's allies are calling for fiscal restructuring through spending cuts), weakening the independence of the Federal Reserve, or intervening in the market alone or with other governments.

Barclays' team concluded that coordinating fiscal methods or agreements with other countries would be difficult, and the costs of weakening the Fed's position or taking action alone in the market are too high.

Mark Sobel, a veteran currency policy expert who worked at the US Department of the Treasury for 40 years and is currently retired, said, "Although the Trump team calls for a 'devaluation' of the dollar, the path to achieving this goal is full of obstacles. The role of the dollar (as a reserve currency) has indeed been established because there are no other options in the short term, but the proposal for dollar devaluation and imposing 100% tariffs on those who refuse to use the dollar are contrary to this commitment."

Editor/ping