Dollar is strong because America is strong

OPINION:

Populists love to rail against globalization for destroying American jobs in once-thriving manufacturing communities. And the strong dollar is a convenient vehicle for former President Donald Trump to animate this frustration.

The greenback is trading at 7.14 yuan and 0.90 euro instead of 3.63 and 0.70, where the cost of making stuff in China and Germany would be comparable to here. That makes imports cheaper than American-made products at car dealers and shopping malls.

The mainstream media like to spotlight Mr. Trump’s exaggerations — they are in the business of campaigning for Vice President Kamala Harris, the Democratic nominee — with headlines like this one from Bloomberg: “Yellen Rebuffs Trump’s Argument on the Dollar’s Exchange Rate.”

But if you read down, you will see that Treasury Secretary Janet Yellen acknowledges some validity to his argument that “a very strong dollar can discourage exports and contribute to imports.”

So Mr. Trump and the Biden-Harris brain trust actually agree about something. But we have to ask why currency markets value the dollar so highly.

The governments of major industrialized countries let market forces determine exchange rates — we haven’t had much central bank or finance ministry currency market intervention since the 1985 Plaza Accord. Rather, economic fundamentals, which are the product of difficult-to-alter, long-standing government policies, make wealth invested in the U.S. economy a better long-term bet than cash stashed elsewhere.

European economies can’t seem to grow because Brussels has imposed an overzealous regulatory environment that, for example, keeps its entrepreneurs from fully participating in the artificial intelligence revolution. Years of underinvesting in defense have put Europe at the mercy of empire-hungry Russia, and their energy ministers are scurrying to replace inexpensive Siberian natural gas.

As importantly, Germany’s manufacturers are having a reckoning.

China — albeit through protectionism and subsidies — has wisely invested in electric vehicles, batteries and the supply industry. Chinese automakers circumvent these by opening European plants as the European Union throws up countervailing tariffs.

German manufacturing is the mainspring of the European economy, terribly dependent on the internal combustion engine and falling prey to European climate change correctness. Brussels has mandated that the sale of gasoline-powered cars in Europe end by 2035.

German industrial production will not likely recover to its pre-COVID level in the near future.

In China, property development, which before COVID accounted for about 25% of growth in gross domestic product, is in a seemingly intractable credit crisis. Homebuilders are nearing insolvency, not delivering millions of homes for which they have accepted deposits and casting a long shadow of pessimism over Chinese consumers — who are not spending enough to resurrect pre-COVID growth.

Chinese industrial production is growing above its pre-COVID trend because the Chinese government is driving manufactured exports and record trade surpluses with subsidies to accomplish 5% GDP growth.

Meanwhile the U.S. economy and stock markets — remember, the New York Stock Exchange is where American capitalism keeps score — is riding the wave of something even bigger than EVs. U.S. businesses are creating the AI industry: chips, software and mundane applications such as industrial site selection.

The U.S. economy has fully recovered and is growing more rapidly than those of its peers. The challenge for the Federal Reserve has been to keep interest rates higher for longer than other central banks to keep a hot job market from blowing the hat off inflation.

Foreign exchange markets are where global capitalism keeps score, and the dollar is strongly valued because the American economy is still exceptional.

President Biden’s industrial policies, if left to run their course, will somewhat rebalance things for manufacturers in the auto, semiconductor, strategic and green industries. But the real problem remains that overwhelming Chinese manufacturing subsidies, Beijing’s nationalistic policies and the geopolitical tensions its navy creates are driving out foreign investors.

The former makes Chinese exports even cheaper, pushing down the yuan’s value even further. Specifically, it drives down foreign demand for the yuan and drives up the supply in foreign currency markets as wealthy Chinese try to get out while they still can.

There is not much Mr. Trump could do should he return to the Oval Office in January.

With a 7% of GDP federal deficit, we are already dumping dollars on global markets. Still, all that seems to do is widen the interest rate difference between U.S. and foreign government bonds, making the dollar even more attractive.

Even if he twists Chairman Jerome Powell’s arm, the Fed can’t go from tight money to terribly easy money without firing up inflation.

Tariffs on Chinese goods would help level the playing field for U.S. manufacturers — more on that in future columns.

But if, as James Carville once lamented, the bond market is more powerful than the pope, then foreign exchange markets are the judgment of God.

The dollar is strong because America is strong.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.