Business / Financial Markets

Trump's 'open-mouth operations' make Twitter key for currency traders

Bloomberg, Kyodo

U.S. President-elect Donald Trump has signaled in an interview that his incoming government may break with the policy of maintaining a strong dollar.

“Our companies can’t compete with (China) now because our currency is too strong. And it’s killing us,” Trump said in an interview with The Wall Street Journal that was published Tuesday.

Trump also said the United States might need to “get the dollar down” if a large-scale tax cut proposed by him drives it higher. “Having a strong dollar has certain advantages, but it has a lot of disadvantages,” he said.

The currency tumbled Tuesday following Trump’s comments, which came days before he takes the oath of office on Friday. It climbed back above ¥113 Wednesday in Tokyo but lacked momentum.

Currency traders are increasingly on guard against the future president’s comments on financial markets.

“The market had focused too much on his stimulus measures since November, and many had thought he would tolerate a strong dollar like previous administrations if the economy is favorable,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co.

Though Trump referred to the dollar’s strength against the yuan, he may start pointing the finger at the yen as well, as both China and Japan appear on Washington’s list to monitor what it calls potentially “unfair” currency practices, Yamamoto said.

Traders in the $5.1 trillion-a-day foreign-exchange market should put Trump’s Twitter account at the top of their daily reading list, advises David Woo, a strategist at Bank of America Corp. who expects the president-elect will use tweets with increasing frequency for his jawboning on the value of the dollar.

“I’m telling everybody to get a Twitter account,” Woo said. “It would not surprise me over the course of the next month — you get strong U.S. data, dollar goes up 3 percent and three days later, the president of the United States is going to be tweeting at 3 o’clock in the morning saying, ‘Guess what, the dollar’s now overvalued by 5.1 percent,’ and the dollar’s going to dump.”

The Bloomberg Dollar Spot Index, which measures the greenback against 10 peers, has fallen for the last three weeks as traders questioned the sustainability of some of the most popular wagers on Wall Street since Trump’s election victory, including bullish dollar bets. The currency had rallied to a 14-year high against the euro this month on speculation that Trump’s spending pledges will fuel inflation and prompt the Fed to tighten monetary policy.

But Trump’s latest comments signal the new administration prefers a weaker dollar to spur trade and bring jobs back to the U.S., a policy that is at odds with fiscal-stimulus proposals that would tend to prop up the currency, according to Woo.

“There is no question in my mind that Trump does not want to see a stronger dollar,” Woo said. “There’s not much he can do about it, except through what I call the open-mouth operation,” a play on open-market operations, which are used by the Federal Reserve to control monetary policy.

Woo expects the currency to climb this year, yet predicts dollar trading will become increasingly volatile after Trump’s inauguration Friday, making bullish wagers less appealing.