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Why a weaker dollar may not give Trump the export boost he is hoping for

President Donald Trump may finally get what he has called for with lower interest rates and a weaker dollar. However, it is unlikely to result in the export boost that he hopes for.

Federal Reserve Chairman Jerome Powell has signaled that the Federal Open Market Committee will likely lower interest rates at its next meeting, for the first time since December 2008 at the height of the financial crisis. The Dollar Index, which measures the value of the U.S. currency against a basket of its developed market peers, has fallen as much as 2.3% since closing at an almost two-year high on April 25, and it was trading 1.1% below that peak on July 16.

Further weakness could be in the cards, according to analysts, including Henrik Gullberg, executive director of emerging markets strategy at Nomura, who pointed to a more dovish Fed as well as a worsening U.S. budget deficit. "It is still too early for a conclusive judgment, but the pieces seem to be falling into place for more pronounced weakness in the dollar," he said.

But while historically a weaker currency would make a country's exports cheaper, the nature of modern global supply chains makes the picture more complex. Exporters often import many of the components of the exported item, neutralizing at least some of the benefits of the exchange rate.

"While a weaker dollar might help them on the export side, it raises their production costs because it raises the costs of their imported inputs," said David Steinberg, a professor of international political economy at Johns Hopkins School of Advanced International Studies. "The net effect, then, is ambiguous."

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That has not stopped Trump from repeatedly taking aim at the strength of the dollar since he took office, arguing that a strong dollar contributes to the ballooning U.S. trade deficit. Trump as recently as July 3 accused Europe and China of manipulating their currencies, and he encouraged the U.S. to "match" them in currency gamesmanship.

Trump has even asked aides to find ways to weaken the dollar ahead of the 2020 election, though economists have warned that weaponizing the dollar and beginning currency wars with major trading partners could lead to more headaches domestically, Bloomberg reported July 10.

Chris Turner, global head of strategy for ING, said in a note that the White House may start to go into its own toolbox for ways to weaken the dollar further, including the possibility that Trump would instruct the Treasury Department to sell dollars and buy foreign currency in a unilateral intervention.

Trade war drag

Exports may benefit more from an end to the trade war with China and a stronger global economy.

"I think a weaker dollar will do less to boost exports than if trade tensions just disappeared," Ryan Sweet, director of real-time economics for Moody's Analytics, said in an interview. "If the dollar weakens further, maybe there's a bit of a boost."

Rajeev Dhawan, the director of the economic forecasting center at Georgia State University's J. Mack Robinson College of Business, believes that the dollar will continue to weaken "slowly but steadily" over the medium term, but that exporters will be stifled by weaker global demand.

"Exports depend on the price of products," Dhawan said. "A weaker dollar helps, but also the growth prospects of the rest of the world are much weaker than they were six months ago, which means a weaker dollar may not help that much."

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In an era of slowing global growth, consumers who benefit from lower import prices would also be likely to suffer.

The weaker dollar's impact on the entire U.S. economy is not necessarily good or bad, but for the global economy, it is usually a positive, said Johns Hopkins' Steinberg.

Foreign countries' purchasing power is boosted when their currency is strengthened against the dollar, as well as their balance-of-payments position, because they spend less on importing, he said. Developing economies may stand to gain the most because many firms have debts denominated in dollars, which depreciate relative to their local currencies, making it easier to service the debt.