Can Trump weaken the dollar for US competitiveness?

One of the more jaw-dropping policy ideas gaining political steam in the US recently has President-elect Donald Trump and his team, on taking office, actively depressing the dollar with the goal of boosting US export competitiveness and reining in the country's trade deficit.

- BARRY EICHENGREEN

If Trump tries, will he succeed? And what could—and probably would—go wrong?

On the question of whether Trump could weaken the dollar, the answer is clearly 'yes'. But whether doing so would enhance the competitiveness of American exports and strengthen America's trade balance is quite another matter.

The brute-force method of pushing down the dollar would entail leaning on the US Federal Reserve, its central bank, to loosen monetary policy. Trump could replace Fed Chair Jerome Powell and push the US Congress to amend the Federal Reserve Act to compel the central bank to take marching orders from the executive branch. Should this happen, the dollar exchange rate would weaken dramatically, which is presumably the point.

But the Fed would not go quietly. Monetary policy is made by the Federal Open Market Committee's (FOMC) 12 members, not just by the chairperson. Financial markets, and even a lapdog Congress, would see abrogating the Fed's independence or packing the FOMC with compliant members as a bridge too far.

And even if Trump succeeded in 'taming' the Fed, a looser monetary policy would cause inflation to accelerate, neutralizing the impact of the weaker dollar exchange rate. There would be no improvement in US competitiveness or the trade balance.