Dollar set to Trump the rand

US President Donald Trump’s proposed ‘America First’ economic policies are set to significantly strengthen the dollar, which spells bad news for the rand and South African consumers.

Nedbank chief economist Nicky Weimar said at the recent Nedgroup Investments Summit that Trump’s tariff policy is much more likely to hurt the rest of the world than it is to hurt the US economy.

Since he started running for president, Trump has floated the idea of imposing a 10% tariff on all products imported into the US.

While his stance has become less certain since his inauguration, Trump is still set on imposing tariffs on many of the US’ biggest trade partners.

Weimar explained that Trump is concerned that China’s exports of goods and services, as a percentage of global GDP, are much higher than the US’ percentage of exports. 

Trump believes that tariffs will rectify this problem – the same belief he held in 2017 during his first term as president. 

“If you recall, he imposed tariffs on China and also on the European Union regarding certain so-called strategic industries,” Weimar said.

However, this did not solve Trrump’s problem during his first term, and Weimar said it was unlikely that he would solve it in his second.

“Did the tariffs reduce the US trade deficit with China? Not at all. Did they change the trajectory of the US trade deficit? Not at all. And it’s probably going to fail again.”

She explained that this is because tariffs carry a couple of unintended consequences that, in Trump’s case, will likely lead to a stronger dollar.

Firstly, tariffs are inflationary, and as inflation rises, US interest rates are unlikely to come down or could rise again. 

“That increases the risk-free interest rate in the market, attracting capital out of other countries into the US. This capital inflow means more demand for dollars, strengthening the currency,” she explained.

Another way tariffs boost the dollar is by giving US producers a price advantage over foreign competitors, which further strengthens the dollar.

The third way tariffs impact the dollar is through Trump’s unpredictability. “Donald Trump, we already know from the first term, is predictable in his unpredictability,” Weimar said.

 Unpredictability means there is much greater risk in the market, and risk tends to encourage demand for safe-haven assets like gold and the US dollar.

“So, this mix of economic policies will likely result in a stronger US dollar,” Weimar explained.

She said the irony is that raising tariffs to discourage imports and reduce the trade deficit ends up making the dollar stronger – completely offsetting the impact of higher tariffs. 

In short, a stronger US dollar offsets the impact of tariffs because it makes imports cheaper and US exports more expensive and, therefore, less competitive, which counteracts the intended effects of tariffs.

“That’s exactly what happened in 2017, and it’s likely to happen again,” Weimar said.

She said the biggest risk Trump’s tariffs pose is to global growth, including South Africa. 

As an emerging market, external trade makes up a much larger portion of South Africa’s economy than it does for the US economy, making the country more vulnerable to these policies.

In addition, a stronger dollar spells bad news for the rand, which is set to weaken against the greenback under Trump if these policies are implemented.

A weaker rand would not only weaken South African households’ purchasing power but also keep interest rates higher, further dipping into local consumers’ disposable income.

This would, in turn, also hamper South Africa’s already stunted economic growth.

Aside from tariffs having an inflationary effect, Weimar explained that several of Trump’s other planned policies are also set to increase price pressures in the US.

This includes his plans for immigration control and mass deportation in the country.

She explained that deportations will shrink the US labour force, driving up wages and, consequently, increasing the inflation rate.

This will keep interest rates high, strengthen the dollar, and, consequently, put pressure on South Africa’s economy.