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The dollar dilemma

Could dollar strength lead to a repeat of the Plaza Accord? asks Neil Wilson
The dollar dilemma

The dollar has enjoyed a remarkable rally over the past two-and-a-bit years, climbing by around 30 per cent against a basket of its major peers since the middle of 2014. Expectations that the Federal Reserve will tighten monetary policy by raising interest rates fuelled the gains, while Donald Trump's election win acted like a nitro-boost.

So, the dollar enters 2017 at its strongest since 2003, before the Iraq war. That should be a good thing for the US, right? Certainly every US president says they want a 'strong dollar' and Donald Trump was no different. But a soaring greenback is not all it's cracked up to be. For starters, it acts as a massive drag on US exporters - hardly what Mr Trump is angling for. Indeed, in an interview with the Wall Street Journal the new president said dollar strength is "killing us". The effect on emerging markets and bonds would also be problematic for the global economy.

If Mr Trump were minded to take action, what could he do about it? He has several avenues of attack. He can talk it down, perhaps taking to Twitter to fire off a few middle-of-the-night missives. But that's only likely to offer temporary relief. There is the option of unilateral intervention by the US - but this risks a currency war. The third option and arguably the most likely to succeed is coordinated intervention with G7 allies.

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