With all the talk of Brazil, Russia, India, China, and South Africa going their own way by moving away from the USD, the presumptive president-elect seeking a weaker dollar that promotes the export of goods manufactured in the United States, and a downward trend in foreign direct investment inflows to the United States, it would appear long term that the value of the dollar would start to decline.
Over what time frame, I do not know. According to data from the U.S. Department of Commerce, foreign direct investment into the United States climbed from approximately $5.16 trillion in 2022 to $5.39 trillion in 2023. However, in 2022, new FDI totaled $177.5 billion, which is well below the average of $298.8 billion experienced between 2014-2021. This down trend in new FDI, according to Commerce, is a reflection of a larger trend of “slowbalization” in the global economy as other nations are seeing decreases in their inward FDI.
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The U.S. may remain the cleanest shirt in a laundry basket of dirty clothes given estimated rates of inflation and estimated return on investment from FDI. Consumer prices, according to the Federal Reserve Bank of Cleveland, are expected to increase around 2.3% per year for the next ten years. Returns on FDI are approximated at 5.3%. I would think that the cost of buying dollars would have to be kept relatively low in order to capture those returns.
Meanwhile, the presumptive president-elect, Donald Trump, must use the persuasive powers of the bully pulpit, the telephone, and the occasional breakfast with the chairman of the Board of Governors of the Federal Reserve System to bring about an interest rate policy that weakens the dollar. How likely that is, I don’t know, especially given Mr. Trump’s disappointment with Chairman Jerome Powell’s past interest rate policies. His nomination of Stephan Miran, a staunch advocate for organizational reform of the central banking system, as chairman of the Council of Economic Advisors sends a symbolic message: that the incoming president wants to exude more influence over the Fed.
To me, Fed reform is a long-term play. The Fed has been around for 111 years this week and without the cooperation of the majority of Congress, the calls for organizational reform and the shorter-term implementation of control by the President over the Board of Governors will not happen.
I expect more energy being used to craft a tactic that balances Mr. Trump’s desire to use tariffs to protect U.S. production and increase manufacturing capacity. Tariffs, albeit against two of the largest trading partners with the United States, Canada and Mexico, can be used to increase new FDI inflows by building additional foreign-owned factories and plants in the U.S. A win on this issue may give Mr. Trump some political capital for reform of the Federal Reserve System.
He will have to move fast.
Alton Drew
24 December 2024
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Show notes
Foreign Direct Investment in the United States. www.commerce.gov.
U.S. International Trade in Goods and Services, October 2024. https://www.bea.gov/news/2024/us-international-trade-goods-and-services-october-2024
Inflation Expectations-Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/indicators-and-data/inflation-expectations?form=MG0AV3
Stephen Miran is Trump’s pick to lead Council of Economic Advisors. https://www.politico.com/news/2024/12/22/trump-stephen-miran-council-of-economic-advisers-00195835. Politico.
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