Could a Weak Dollar Become Trump’s Key Strategy?

Scott Bessent, the incoming Treasury Secretary, suggests that a weaker dollar could become the cornerstone of economic policy during Trump’s second administration. Insights from a January letter penned by Bessent during his time at a hedge fund offer a glimpse into this perspective.

In the letter, Bessent argued that a weak dollar policy might be favoured over imposing tariffs. Tariffs, he noted, often lead to inflation and inadvertently strengthen the dollar. This would be an unfavourable outcome for fostering a U.S. industrial revival. Instead, devaluing the dollar early in the administration could enhance the competitiveness of American manufacturing, especially when combined with abundant, affordable energy resources. This strategy, he suggested, might spark significant economic growth.

This should be to nobody’s surprise. Trump was already US President not long ago and that is exactly what he wanted. He even celebrated when the Dollar weakened and openly referred to its devaluation as a ‘gift’.

Bessent dismissed the prevailing Wall Street sentiment that anticipates a strong dollar, calling the rationale flawed. He stated that a robust dollar might emerge later in Trump’s term if efforts to reshore manufacturing prove successful.

Addressing trade-offs linked to tariffs, tax cuts, and fiscal deficits, Bessent suggested that devaluing the currency could sidestep these challenges. A weaker dollar would benefit broad economic measures while offering targeted advantages against the yuan and yen. Such a move could even help China position itself favourably in avoiding U.S. tariffs.

Given Bessent’s role as the incoming Treasury Secretary, these insights deserve serious consideration, suggesting a potential pivot in economic strategy. If Trump is able to increase overall liquidity to devalue the dollar, this could likely have very positive implications for the prices of gold and silver.

Potential Liquidity Moves in Europe

Meanwhile, Europe may be on the brink of introducing more liquidity measures. While markets currently assign just a 20% likelihood of a significant ECB rate cut at the December 12 meeting, JPMorgan analysts are advocating for a more aggressive approach, predicting a 50 basis-point cut.

Eurozone inflation data released last week indicated mixed signals. Core CPI for December came in at 2.7%, slightly below the expected 2.8%, while the headline CPI climbed to 2.3% from a prior 2.0%. Despite this uptick, the ECB downplayed concerns, expressing optimism about inflation aligning with the ECB’s target.

The ECB’s deposit facility rate currently stands at 3.25%, leaving room for potential rate adjustments as economic conditions evolve.