Good morning. The threat of prohibitive “reciprocal” tariffs may have temporarily receded this week, but in one way, a 10 percent barrier for foreign companies exporting to the U.S. remains in place: the U.S. dollar dropped in value by about a tenth against a basket of currencies in the last few weeks, including against the euro, pound, Swiss franc, and yen.
President Trump has long believed that a strong dollar hurts U.S. manufacturers—making their goods less affordable in foreign markets—and has therefore wanted to devalue it. Despite the dollar being free-floating, it is one area where Trump’s wishes have been self-fulfilling, to a degree. His on-and-off again tariffs on imports, efforts by the administration to drive down government borrowing costs, and pressure on the Fed to lower interest rates, have dented markets’ trust in the greenback and plunged its value compared to other currencies.
To understand what’s happening now, and how it will affect U.S. and global multinationals, I spoke to LSE professor Paul De Grauwe, whose early 1990s work on “chaotic” exchange rates remains a fundamental text for economists today. Here are his takeaways for leaders:
This is nothing new. The dollar dropped in value, but it did not do so in a “phenomenal” way, De Grauwe noted. “It doesn’t worry me.” In fact, the dollar today is trading at about its 10-year average against the euro. And even the drop of about 10% in the past two months isn’t anything out of the ordinary. Back in 2017, the dollar dropped twice as much in a year.
CEOs were able to adjust then, and they can do so again now, the economist said. For foreign companies, it means “you’ll either have to raise prices, or lower profits,” he said, dryly. “It is always this way with currencies.” And for U.S. companies, the opposite is true. But in either case, the adjustment will be absorbable, and nothing new under the sun.
Don’t expect a Mar-a-Lago accord. De Grauwe isn’t buying the rumors about a possible “Mar-a-Lago” accord, where—in accordance with Trump’s wishes—global policymakers would help drive down the value of the dollar structurally. “It is fiction,” he says. Back in the 1980s, the so-called Plaza Accord did achieve that goal, halving the value of the dollar against the Deutsche Mark in the space of a year.
But two things will prevent any such plan today. First, the global economy is a lot more diversified, with China and other emerging markets having entered the scene, making effective interventions harder to coordinate. And second, the dollar isn’t as overvalued today as it was then, when a belief in the “wonder of Reagonomics” had doubled the dollar’s value in the years leading up to the 1985 Accord.
Watch the Treasury. The one place that could stir things up, De Grauwe said, is the Treasury. “The safe-haven reputation of the dollar is important,” he said. “The dollar has had this reputation for a long time. But that is now undermined.”
More specifically, if the administration ever became serious about forcing a swap between 10-year Treasuries and newly created 100-year ones (the so-called “forever bond”, which today remain a concept only), it could mean the end of the safe haven status of the U.S. dollar, and cause a dramatic fall in its value. For now, he said, that didn’t seem likely to happen. But with this administration, predicting the future is, to put it lightly, hard to do. More news below.—Peter VanhamContact CEO Daily via Diane Brady at diane.brady@fortune.com
This story was originally featured on Fortune.com
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