A week has passed since President Trump was sworn as the 45th President of the United States and the financial market is trying to digest the new administration's policies.
Given the transition to an administration that is unprecedented in many ways, the dollar slipped to a six-week low this week, as the market is in assessment mode.
Since the November election, the dollar had strengthened by about 8 percent, stocks rallied more than 10 percent and the U.S. yield curve steepened, with the 10-year treasury yield increasing almost 100 basis points in anticipation of three or even four interest rate hikes this year. The market responded to Trump's pro-growth fiscal policy proposals to boost our economy, including tax cuts, infrastructure spending and deregulation.
But his trade policy sounds a bit protectionist, as reflected in his inaugural exhortation to “Buy American and hire American.” That could initially put a brake on the economy.
In his first days in office, the new president has already undone the Trans-Pacific Partnership, pledged to renegotiate NAFTA and initiated talks with China attempting to implement policy that would heavily tax companies that export manufacturing jobs.
The problem is that, in Economics 101, we were taught that free trade expands national wealth by lowering the price of goods and lifting wages. So is President Trump's policy turning the clock backwards or are we learning new things about trade that we – and economists – have overlooked?
Free trade does result in a reduction in prices, but the distribution of profits may not have always been shared equitably, and perhaps not enough was done for American workers whose jobs were shipped overseas.
While the U.S. labor force is generally fairly mobile and willing to transition to new industries, there is always a transition cost involved. If the lowest-income workers cannot bear that cost and cannot migrate to new regions or industries, they can be left behind.
Whether it be the U.S. Presidential election results, Brexit or the civil movements stirring now in Europe, all this may be a reflection of how we need to rethink free trade and manufacturing jobs in advanced nations so that wealth does not end up concentrated in the hands of the richest.
My View: Equitable free trade issues are becoming more important and the market is still trying to digest what that means from a global perspective. The strong U.S. dollar that has been prevalent since President Trump's election was highly predicated on the speed of U.S. economic growth and resulting monetary tightening. Any signs of a brake on this speed would put brakes on the dollar, too.
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