Reports suggest that recently President Trump asked National Security Adviser Michael Flynn about whether it was a strong or weak dollar that was in the US interest. According to the leaks, Flynn suggested asking an economist. Â
The simple question is very revealing for those of us still trying to get a handle of the unorthodox new Administration. First, it means that the President has not made up his own mind, which implies more fluidity than some of the strongly worded statements and tweets suggest. Second, it underscores our caution that the formal power structure may not apply. Informal power structure may be more important. There is always some tension between how much authority the White House and in the cabinet. Trump’s style suggests much will kept in the White House. Third, in the early days of the Administration have been marked by a steady stream of leaks, agitating the already tense relationship between the White House and some parts of the media.
Many seem to be asking the same thing about the dollar, but the question is naive and misguided. It wrong assumes that the US economy, or any modern economy, is a homogeneous entity instead of diversified and complex system. In the simplest terms, it might be more helpful to recognize that there are winners and losers for different policy configurations. We already see it with the coming debate over the so-called border adjustment (tax on imports and a tax break for exports), as several large US businesses are on both sides.
The question assumes a static and one-dimensional view. What is strong and weak changes over time. Also it may vary over the business cycle. There are also various measurements that can be used to give a holistic view. Sometimes the dollar can be strong against emerging market currencies and weaker against other major currencies.There are real and nominal trade-weighted measures and various equilibrium models, like purchasing power parity and real effective exchange rates. The euro may be undervalued for German producers, but it may also be overvalued for Italian or Greek, and maybe French exporters.
