The US dollar in 2017

The top trade adviser to the US President Trump, Peter Navarro, accused Germany of using undervalued currency to exploit its trade partners, including other European countries as well as the US. The problem of the common currency used in the Eurozone has been long existing and has caused a significant crisis. The main problem of using a common currency is that different economies with different structures and situations share the same monetary policy that does not fit every single individual economy. Germany has a strong trade position as it has a strong industrial sector; it has the strongest trade competitiveness among all Eurozone economies. By taking the advantage of the common currency that represents the general image of the Eurozone economy, which is cheaper than if Germany used its own currency, Germany is able to export more goods and services by using the relatively cheaper currency. The criticism by the US top trade adviser could add more uncertainties in the Eurozone, especially given some countries have been arguing if they can be better off by quitting the currency union.

As the problem has been long existing, the comment by Navarro is targeting to appreciate the Euro in order to weaken the US dollar. The current US President Trump has always been complaining about the "too expensive" US dollar due to many other main currencies have been "undervalued", including the RMB, the Euro. However, the current Trump's plan seems to have a mixed effect on the US dollar. There are some factors that may drag down the US dollar's value. The economy is expected to be boosted by Trump's plan of expanding public expenditure in infrastructure. In addition, the protectionism will reduce imports and create more jobs domestically, this will add more inflationary pressure in the domestic economy. Once there is an increase in the domestic inflation rate, the currency is likely to depreciate. Moreover, Trump's plan is likely to increase the public debt, this can lead to a depreciation in the US dollar. Meanwhile there also are some factors that can lead the US dollar to appreciate. Firstly, the protectionism encourages more investment within the US, this will lead to more capital flowing into the US, thus the US dollar appreciating. Secondly, the US Federal Reserve is unclear if it will increase the base rates in the first quarter of 2017, but it is very unlikely to cut its base rates in 2017. When the base rates increase, more capital will be attracted into the US, and the US dollar will appreciate. Thirdly, Trump wants to encourage more US exports. As exports increase and imports decrease, the improvement in the American current account is very likely to cause an appreciation in the US dollar. Fourthly, if Trump is able to successfully lower the public debt, the US dollar will also appreciate.

Overall, I expect that the US dollar in 2017 may depreciate to a small extent against the Euro and the Japanese Yen.