Hard talk on trade, soft on the dollar

President Donald Trump spends the week ahead on his first foreign trip as president. Investors should watch the dollar for a real-time assessment of Trump’s trip.

While the president’s visit to Saudi Arabia, Israel and the Vatican understandably will receive plenty of attention for its juxtaposition of faith, geopolitics and security, the agendas with NATO and the G7 late in the week is where his economic diplomacy will be tested.

On Thursday, the president will meet with his NATO allies. He wants NATO countries to increase their financial contributions to the regional defense alliance. Then on Friday and Saturday, five of America’s eight biggest trade partners will be among the G7 leaders meeting in Italy. While Europe has largely escaped the Trump’s trade tirade, he signed an executive order for a comprehensive review of all trade deficits, which includes our six partners in the G7.

The tough talk on trade could be seen in the U.S. dollar. A stronger dollar had been part of the Trump trade since Election Day. It reflected the candidate’s pledge of faster economic growth, helped by what he deemed more fair trade. A stronger economy helps strengthen its currency. But that can hurt trade by making American goods and services more expensive to international buyers.

The president’s tough trade talk was a centerpiece of his winning campaign. But in April he told the Wall Street Journal, “I think our dollar is getting too strong.” As he complained unfair trade deals don’t allow the U.S. to equally compete, he acknowledged the stronger currency makes the U.S. less competitive. Since then, the dollar index has fallen almost three percent.

Almost half of profits by companies included in the S&P 500 Stock Index are generated outside the U.S. The value of the dollar against international currencies is felt on their bottom lines. Apple, DuPont, Johnson and Johnson were just some of the companies reporting a stronger U.S. currency hurt their results in the most recent quarter.

While the tough-guy approach over trade may lead to new opportunities, the soft sell of the dollar hopes to help current profits.