Will Trump's protectionist policies lead to an outlook of depreciation for the US dollar?

Many economists, as well as business owners, are concerned that Donald Trump's protectionist stance is going to have a serious impact on U.S. growth, and for those with an interest in forex data and currency futures, this means depreciation of the dollar over time.

Here, we look at what protectionism could mean, and whether there are other policies under Trump that may be able to offset the negative view on this in economic circles.

What Is Protectionism?

Taking a protectionist stance, as Trump does, means establishing policies that discourage or restrain international trade. This can be done with regulatory things like quotas, or by imposing things like heavier import taxes. In the United States, protectionism is something that the markets tend to distrust, as it can trigger trade wars in which nobody really wins. Trump has been clear in his protectionist leanings since before he was elected, and is already starting to effect related policies in the first weeks of his presidency.

Why Is Protectionism a Major Concern?

Economics and business experts are lauding Trump's trade positions as the biggest threat to the American economy, despite responding favourably to some of his other potential positions, for example on reducing taxes for individuals. Their main concerns are that countries hit by heavy import taxes will implement similar retaliatory taxes for U.S. exports, and that trade relations with important trading partners like China and Mexico will deteriorate immeasurably.

Will There Be a U.S. Recession?

Hardly anyone sees a major risk of the United States going into a recession off the back of Trump's plans, however growth is expected to be somewhat lower than Trump's claims of 4%, with analysts expecting it to be more around the 2.5% mark in 2017, rising to 2.75% in 2018. What Trump brings to the economy is a very mixed bag of things, and some just see things like import tax hikes as a gambit to gain leverage, rather than a bona fide attempt to gain extra revenue. Trump has some highly pro-business policies, and so the protectionism coupled with attempts to bolster domestic enterprises with things like lower taxes may be seen as a positive on a national level, though dangerous on a global one. This is why there is so much uncertainty going around in the financial markets at the moment where America is concerned.

Futures Analysts Split on What This Means for the Dollar

Forex analysts are somewhat divided on what Trump's protectionism will mean, with some believing the dollar will decrease in price against other currencies as expected, but others thinking that while this protectionism will be an impactful factor, it will be offset by other things, like the Fed holding fast on interest rates, along with other fiscal policies like tax cuts that support the dollar.

It has been anticipated since the start of his campaign that Trump would usher in one of the most protectionist eras in US fiscal history, and initial policy introductions like import taxes for Mexico (notionally to pay for the infamous 'wall') show that he could go further in this direction than anticipated, coming off the back of the already moderately protectionist Obama administration. It remains to be seen who is right about whether this will cause a long term reduction in dollar price, making US dollar futures an interesting area whichever position makes more sense to you.