More than sixty years ago, on 23 July 1962, the US President John F. Kennedy used the occasion of the first satellite TV link with Europe to warn speculators about attacks on the US currency: “Those who betting against the dollah are going to lose”. His warning worked: the sellers backed off.
Are there speculators today? Of course there are. But their job is tougher than it was in JFK’s time. And the trade policies of the current US administration have complicated things further. In principle, tariffs reduce the demand for the foreign currency and so increase the relative value of the domestic currency. So the US tariffs should have led to an appreciation of the US dollar. In practice, the opposite seems to have happened. Economic theory should have pushed the dollar up, but this was more than counteracted by the policy uncertainty pushing it down.
And there is also the idea going around that in fact the policy choice was to weaken the dollar, to make US exports more competitive and bring back manufacturing investment to the US. So pulling the lever provided exactly the reverse effect to what was expected, but apparently it was what they wanted anyway. “Grapes-and-the-fox” rather than “Fox-and the-grapes”, so to speak.
The IMF didn’t have things easy in producing the latest edition of the “World Economic Outlook”. Attention naturally focuses on their growth projections, which they have downgraded as a result of the trade and financial uncertainty, with 2.8 per cent GDP growth for the world in 2025 and 3.0 per cent in 2026, a cumulative downturn of 0.8 percent.
But it’s also interesting to see what they say, or rather imply, about exchange rates in the future up to 2030, which is the end year for the IMF projections. They don’t give projections for exchange rates explicitly, but they do give GDP figures in national currencies and in US dollars. Based on these, the dollar shows hardly any change against the euro between now and 2030. It loses a little against the Canadian dollar, and a little more against the yen and sterling. The yen gains about 5.5 per cent against the dollar and sterling nearly 8 per cent. Looking at the BRICs currencies, the position is very different. The only currency to appreciate is the China’s, the renminbi, and by less than 3 per cent between now and 2030. India’s drops 3 per cent, Brazil’s 5 per cent, Russia’s 11 per cent and South Africa’s 12 per cent.
Are these projections for the dollar reasonable? Maybe, maybe not. The downside risks include continued confused and rapidly changing policies in Washington, possibly increased pressures on the Federal Reserve, continued increase in the debt burden and in the servicing costs, expenditures on a new US anti-missile system called the Golden Dome, inflationary pressures due to restrictive trade and immigration policies, and so on. Upside risks? I’ll have to get back to you.