It’s a policy: the dollar is at a four-year low, and not just against the shekel

According to the estimates of many economists, the macro conditions support the continuation of the shekel appreciation trend. This is due to local factors such as foreign exchange sales by institutional entities, a surplus in Israel’s current account (more dollars coming in than going out), and the recent impressive wave of exits. At the same time, there is another major factor influencing the fluctuations, which is in the White House.

The drop against the shekel is only part of the picture: the US dollar has weakened significantly over the past year against the major world currencies. This week, for example, the Dollar Index (DXY), which measures its strength against six major currencies, plunged 1.3%. The reason: Donald Trump’s words. During a visit to Iowa, the president referred to the devaluation of the currency, 11% in the last year, and signaled that he is not bothered.

“I think it’s great… the dollar is performing great,” he answered a question from one of the journalists. Trump added that he wants the dollar to “find its natural level. Look at the business we do. With Japan and China I fought hard because they always wanted to reduce the value of their currency. I said it’s hard to compete when they reduce the value of the currency.” In doing so, he gave the signal for the sharp decline, which resulted in a four-year low in the dollar index.

Why does Trump want a weak dollar?

Trump said in his voice that the weakening of the local currency is not an accident, but a policy. A devaluation of the currency serves several purposes: first, it causes the erosion of the enormous American debt, which stands at over 38 trillion dollars. Second, it increases the attractiveness of American exporting companies, as their products become cheaper for buyers holding foreign currencies. In addition, the weakening improves the US trade deficit, as the price of imported products becomes more expensive, which may encourage domestic consumers and businesses to choose domestically produced substitutes. This is a key tool in protectionist policies, designed to protect domestic industry from cheap foreign competition.

Another possible explanation is putting pressure on the US’s trading partners, who are working deliberately to weaken their currency, in the framework of what is known as a ‘currency war’. Finally, a weak dollar also supports the profits of multinational companies that are recognized in foreign currency values, which translates into more dollars in the profit line and supports the increase of stock indices traded on the stock exchange.

Ofer Klein, head of the economics and research department at Harel Insurance and Finance, adds and points out that in the case of the USA, among the beneficiaries are also emerging markets that took debt in dollars: “Thus, their debt is discounted. Let’s recall that even in Israel once upon a time in the distant past it was possible to take a dollar mortgage. In other words, anyone who has debt tied to the dollar is making a profit.” Klein points out another possible explanation for the devaluation, which is the identity of the investors in the dollar: “It seems that the Chinese, the Japanese and Saudi Arabia, who bought dollars in the past, are now buying less.”

“A perfect storm is an understatement”

Tamir Hershkowitz, senior vice president and director of the investment division at Ayalon Insurance and Finance, tells Globes that “When you say a perfect storm against the dollar, it’s an understatement. Since Trump took office a year ago, the DXY has fallen by double digits. This was at a time when there were price increases in stock indices. Overall, the markets liked the election of Trump once again, because they remembered that in the previous term he lowered corporate taxes. That’s why he is very much in favor of the market, in favor of the companies.

“Then he entered his office in January of last year and straight up said: trade war. It was from this point that the dollar weakened against the euro by 15% (to date). Even when we saw that the stock markets corrected sharp declines (as in April following the announcement of the trade war), the dollar did not correct. It continued to be weak against the euro and against the basket of currencies.”

The mirror image of the weakening of the currency

Along with his last statement this week, Hershkowitz mentions a number of other recent events that support the devaluation of the dollar, such as the operation in Venezuela in which the US captured the Maduro dictator, the struggle for the annexation of Greenland, the current tensions with the Ayatollah regime in Iran. The American government less. That’s why we prefer to invest in shares of American companies, but we will sell the dollar.”

Hershkowitz also mentions another phenomenon derived from the weakness of the dollar, and it fled from it to precious metals such as gold and silver. As evidence of this, this week the price of an ounce of gold crossed the $5,000 mark, which is an increase of 84% within a year and 175% in the last five years.

According to him, “Investors are hedging the risks and looking for new reserve currencies. There is a direct connection between the actions that governments and central banks do and build themselves alternative reserves, for example through gold, to the price of the dollar.”

A deliberate course of currency devaluation also embodies quite a few risks, chief among them the loss of market confidence. “It’s fine to encourage exports by slowly eroding the exchange rate,” Hershkovitz believes, “but when you lead a situation where the currency depreciates by 20% against the euro within about a year, it’s an expression of mistrust on the part of the markets. The US is also not an exporting country but more of a consuming country. That’s why all imported products become more expensive there by tens of percent. The cost of living in the US is huge on the back of the consumer there.”

He concludes that “there is an attempt to present the current state of the dollar’s weakness as an achievement, but this is a testament to how investors and countries treat Trump. They look at him as someone unpredictable and frenzied who leads them to prefer to spread their investments into different currencies.”

The losers: not just the S&P 500 savers

Among the losers from the devaluation of the currency are the foreign investors who bought American assets without hedging, such as Israelis who invested in the S&P 500 or in US real estate. Klein Mehral also mentions the American consumer.

“The situation does not improve the situation of any American consumer. If you look back, in the view of a hundred years, the majority of the secretaries of the treasury and presidents of the United States said that they wanted a strong dollar. Because it is good for the American consumer who represents over 70% of the economy there. The global demand for the dollar created a situation in the past where Americans lived above the standard of living that was supposed to be theoretical. There was a high demand from countries and central banks for the dollar which was a reserve currency. So now, all the central banks and those who held the dollar as a reserve currency lost. As a general rule, anyone who owns dollar assets – such as stock indices (S&P 500) loses.”

Klein says that “it’s a little surprising that Trump says he’s happy with it. But the real wonder is how the weakening of the dollar hasn’t happened until today,” given that the Americans ran a huge deficit, in the trade balance and in the government budget.” He mentions that “the exchange rate is ultimately determined by supply and demand. They like to give the example with the cucumbers, maybe because they are as green as the dollar. If you have a lot of cucumbers to sell and demand remains the same, or weakens, their price goes down. Bottom line, according to him, “Americans have fewer dollars entering the economy than going out into the world, so the dollar is weakening.”