Macklem Warns Trump-Era Policies Dented Global Confidence in U.S. Dollar
President Donald Trump’s erratic trade policies and attempts to influence the Federal Reserve have hurt the U.S. dollar’s status as a safe-haven asset and raised questions about the independence of U.S. monetary policy, Bank of Canada Governor Tiff Macklem said Tuesday.
In a speech in Saskatoon, Mr. Macklem said that the U.S. President’s decision to impose sweeping tariffs on trade partners and continue running massive fiscal deficits is changing how investors view the U.S. dollar.
“It’s too early to know if this is the start of a new era. For now, the greenback remains dominant, and – without a clear alternative – I suspect it will remain the global reserve currency for the foreseeable future. But for many, its value as a hedge in times of stress has been dented,” Mr. Macklem said.
He added that Mr. Trump’s attempts to influence the Fed “are raising questions about the continued independence of U.S. monetary policy.”
In recent months, the President has undertaken an unprecedented campaign to influence his country’s independent central bank and push it to lower interest rates. He has threatened to sack Fed chair Jerome Powell, appointed close ally Stephen Miran to the Fed’s board of governors and tried to fire governor Lisa Cook – a move she is contesting in court.
The Fed cut interest rates last week for the first time in nine months. Mr. Powell said the decision to resume easing was because of a slowdown in the labour market, not because of political pressure.
“Chairman Powell is doing a very good job under very trying circumstances, and he is guiding monetary policy based on evidence, not politics,” Mr. Macklem said in a press conference after the speech.
But he cautioned that a loss of Fed independence in the future would have consequences for the rest of the world, given the central bank’s position at the heart of the global financial system, and impact the performance of the U.S. economy. Mr. Powell’s term as chair is scheduled to end in May.
“The lesson from history is clear … central banks that have operational independence for monetary policy do a better job at delivering price stability for their citizens. And the second thing we know is that countries where inflation is low, and in particular where inflation expectations are well anchored, those economies perform better,” Mr. Macklem said.
Until now, Canadian central bankers have mostly avoided commenting on what’s happening to their peers south of the border. But Mr. Macklem said the Trump administration’s actions are starting to have consequences for the broader financial system.
This was evident in April, when the President unveiled double-digit tariffs on dozens of trading partners on what he called “Liberation Day.” Equity markets sold off sharply, as expected with companies facing hefty tariff charges. But so did U.S. dollars and treasury bonds.
“Usually when financial markets are very stressed, there’s a so-called flight-to-quality. People pile into U.S. dollars. The U.S. dollar appreciates. Yields on longer term U.S. bonds usually go down because so many people want to hold them,” Mr. Macklem said.
“That didn’t happen actually. The U.S. dollar depreciated, long bonds backed up. And that change caught a lot of financial market participants off guard. And as I said in my remarks today, it dented the U.S. dollar as a hedge in times of stress.”
U.S. equity markets have rebounded since April and hit new highs. But the greenback has depreciated against other currencies, while other safe haven assets, such as gold, have appreciated sharply.
Much of the speech to the Saskatoon Chamber of Commerce focused on what Mr. Macklem called “megatrends” in the global economy, which are creating financial stability risks and putting Canada’s trade-reliant economy on a back-foot.
Global trade has slowed. America has lost its position as the world’s dominant trading country, while retaining its spot at the heart of global finance. And trade imbalances between countries are widening.
“President Trump did not precipitate these megatrends, but his policies will likely reduce trade with the United States further and could dent the U.S. dollar as the global safe asset,” Mr. Macklem said.
In order to navigate these changes, Canadian politicians and businesses need to focus on diversifying markets away from the U.S. and improving productivity and competitiveness at home, he said. They also need to be prepared for new financial stability risks that might emerge from the shifts in global commerce and capital flows, he added.
“We should have been making these changes 15 years ago. But the next best time is now,” he said.
Monetary policy can only play a supporting role in helping the Canadian economy adjust, he said. Trade disruptions slow down economic growth but increase costs, putting inflation-targeting central banks in a tough position.
The Bank of Canada cut interest rates last week for the first time since March, bringing the policy rate to 2.5 per cent. Mr. Macklem gave no hint of what will happen next for interest rates, saying only that the central bank was “proceeding carefully with particular attention to the risks and uncertainties.”
This article was first reported by The Globe and Mail
