TRUMP GETS EVERYTHING HE DESIRES

Trump seems to be forcing the US trading partners into a so-called ‘Mar-a-Lago’ accord

As we approach the end of the first six months of Donald Trump’s second coming, we can certainly conclude that it has been dramatic, chaotic, uncertain, volatile, or whatever other adjective one chooses to use. The one thing that has become clear is that Trump is already achieving much of what he set out to achieve, with the safe passage of the ‘big, beautiful bill’ ahead of July 4^th just the latest and most significant achievement to date. The power which he exerts over the Republican Party is quite extraordinary and leaders like Keir Starmer must really be envious of his ability to force members of his party to do what he wants them to do. Poor Keir’s first year in office stands out in marked contrast to the US situation.

One of the most noteworthy developments over his first six months has been the significant decline in the value of the dollar. On the surface one might be tempted to conclude that the descent of the dollar is indicative of failure and a loss of confidence in the primacy of the dollar, but the reality is that this is exactly what Trump set out to do. Trump seems to be forcing the US trading partners into a so-called ‘Mar-a-Lago’ accord, which is based on the idea that the US could force other countries to accept a weaker dollar and lower interest rates on their US Treasury investments in order to be still protected by the US security umbrella. This has shades of the ‘Plaza Accord’ of 1985, where the UK, France, West Germany, and Japan agreed to work with the US to weaken the dollar.

The reason Trump wants a weaker dollar is because he believes that the strong dollar has contributed to the demise of the American dream through the dismantling of the US manufacturing base and the loss of blue-collar jobs. His logic is that the reserve currency status of the dollar has damaged the export base and forced the US to become dependent on imports, and hence becoming increasingly dependent on the outside world. He has set out to change this and is doing everything in his power to weaken the currency. He is succeeding.

When Trump took office in late January, the dollar was trading around 1.0250 against the euro and today it is trading just under 1.18, which is equivalent to an appreciation of over 15 per cent in the value of the euro against the US unit. This will obviously make Euro Zone exports to the US much less competitive and will make imports into the US that much more expensive. The big issue overlying all of this is the fact that next week we may get some clarity on the tariff regime between the EU and US, and while a decision might be postponed further, there is a growing sense that 10 per cent tariffs could apply on EU exports to the US eventually. This would not be a bad outcome, given how much worse it might be. However, if a10 per cent tariff is combined with a currency appreciation of just over 15 per cent to date, it makes EU exports into the US significantly less competitive. Trump’s hope of course is that this will force US consumers and businesses to substitute imports with domestically produced goods. As a key exporter to the US, the challenges for Ireland are clear.

While there is massive global criticism of Trump’s policies, the reality is that the US economy is still significantly outperforming the Euro Zone, with employment data last week showing that the labour market remains buoyant. Furthermore, data published last week show that in May, the US collected $24.2 billion (€20.5billion) in tariff revenues, which is almost four times higher than a year ago. All of this adds up to the possible conclusion that not alone is Trump getting everything he wants the policies may be working for the US. It is still too early to jump to any definitive conclusions, but the omens so far will please Trump.

For the European Central Bank (ECB) there is now a growing concern that the appreciation of the euro will be very deflationary, with the risk that inflation might significantly undershoot the 2 per cent tariff. The only way to respond to that would be to cut interest rates further, so the outlook for Irish borrowers might just get better over the coming months.