Tariffs or no tariffs, dollar correction is finally here: Jen

Dollars are likely to start multi-year correction of various currencies, even without a trade war, because the high assessment of wall street from the dollar takes place against main street reality.

After the broad-based tariff announcement on the “Liberation Day” of President Donald Trump on April 2, the global equity market experienced a correction of violence, and the dollar initially weakened the idea of ​​consensus that the tariff was equivalent to a strong dollar.

This episode has raised the question whether the “dollar smile” has stopped working, because this practical rules will suggest that the Risk-off scenario must lead to a strong dollar.

But I don’t think the dollar smile is outdated. I think what happens is that the price of the dollar high clearing in the asset market finally gathered with the actual value in the goods market.

The value is too high

Trade globalization has enriched the whole world for the past quarter of a century, but the real world of multi-polar has not been accompanied by multi-polar finance world: dollar assets and dollars continue to dominate.

This unipolar financial world means that there is a large foreign demand for USD assets, disproportionate with the relative size of the US economy. This is arguably causing excessive vision of the dollar, an even greater external deficit for the US and the uncompetitive manufacturing sector, because the cost of manufacturing labor has provided US prices from the global market.

The dollar index of around 19% was too expensive at the end of 2024, according to our assessment framework, using median assessment in 34 currencies.

This is the third episode of the dollar overshoot in the last 40 years, following which in the mid-1980s and around 2000.

While the size of the dollar overshoot is currently a little less extreme than what was witnessed in 1985, on the night of the Accord Plaza – a joint agreement to weaken the current dollars is the longest.

With our calculations, the dollar has been judged to be excessive for 10 years, almost two times the length of the previous two episodes.

Extraordinary miracle

Most dollar appreciation in recent years has been justified with the narrative of ‘American executive’, the idea that American companies are only more productive, more profitable and more dynamic than the whole world.

But the story seems to have become the original part and become a mirage.

The US economy has enjoyed premiums in productivity growth compared to other major economies in recent years, with an average annual labor productivity growth rate in the last decade of around 1.4%, compared to 0.5% in Europe.

However, these productivity steps may be misleading. For one, the technology sector has almost certainly improved it. There is a little evidence that the manufacturing sector and traditional US services such as health care or education are more productive than the sectors of each abroad.

More importantly, fiscal stimulus that is too large-and not sustainable-from around 6.5-7.0% of GDP in recent years has flattered many macroeconomic steps that have helped prove the idea of ​​’American executive’.

Capital repatriation

The increasing dollar assessment is also vulnerable because it is very exposed to the risk of ‘stopping suddenly’ in the inflows of foreign capital, given the position of the US Clean Foreign Accountability.

In 1980, the position of US net accountability was worth around 10% of GDP. Now it has jumped up to 85% of GDP.

The dollar rose in line with foreign demand for USD assets ascended in line with foreign demand for USD assets

Thomson Reutersdollar rose in line with foreign requests for USD dollar assets up with foreign demand for USD assets

The trade war is still far from finished, and the more protracted, the more Fed will be under pressure to provide monetary stimulus, while many of the other world will be under pressure to provide fiscal stimulus.

The weaker dollar produced can, in turn, triggers the prospective repatriation of short -term capital back to surplus jurisdiction like Europe or China. Some European countries, including Britain, Ireland, Germany and France, have substantial short -term capital that has the potential to be discharged easily. In the aggregate, these four European countries have more than $ 8 trillion of equity and US bonds.

Shadow price

There are at least two shadow prices for currency exchange rates: one reflects the capital market, and the other reflects the real economic fundamentals. In most countries and most of the time, the price of this shadow tracks each other. But in the US, the first material is higher than the last for years, creating an unsustainable and vulnerable arrangement for a high dollar.

And the dollar overfaction has become one of the factors that contribute to the loss of US manufacturing competitiveness.

Trump tariff is a reaction to this unpleasant reality.

Considering the government’s objectives expressed in reaching out and reducing the country’s twin deficits, it does not make sense for us to expect dollars to respect in responding to trade war, wherever the tariff ends.

If there is, it is more likely that administration will be focused on guiding lower dollars to give us a manufacturer of opportunities to compete in a very competitive global market.
Source: Reuters