Time To Leave the Party?

The US dollar recorded its second consecutive week of gain for the week ending May 2nd. Is this the start of a trend, or time to leave the party, reduce dollar exposure? To fix the balance of trade between the US and the world, tariffs are the tool of the day. But tariffs are not the only tool that can be used. A US dollar devaluation can do the trick too. Tariffs discourage consumption of foreign items or imports. Their goal is to stimulate consumption of domestically produced goods, also called “import substitution”. If tariffs fail to improve the US trade balance, then dollar devaluation may be next. Lowering the value of the US dollar makes US goods cheaper, so foreign buyers buy more. When they buy more, US exports go up, and if that is greater than the growth of imports, the problem may be solved. The metric to measure whether trade is getting better or not is the US monthly trade balance, the US dollar difference between exports and imports. A surplus (rarely if ever in the US), means more is being sold to non-US entities than being bought from non-US entities A deficit shows the US is buying more goods from outside the US than consumers outside the US are buying US goods. One year ago, the monthly US Trade deficit was $68.5 billion. In its most recent reading, it was $122.6 bn or a 78% deterioration. Medium-to-long-term tariffs may do the trick, but we must be prepared for something else-a weaker dollar. No one should be surprised if the US pursues a weaker US dollar. They have already expressed interest in new programs to lower the dollar, like the Mara Lago Accord. And China is the second largest holder of US debt. If China starts selling their debt and moving back to their currency, dollar watch out. To show how fierce a dollar decline can be, look at Taiwan. On Monday May 5th the Taiwan dollar went up 5% against the US dollar, the biggest move since 1988 as traders speculated that authorities might allow it to appreciate, to help reach a trade deal with US. Such US dollar price action is important because US dollar stable coins represent 99% of all stable coins worldwide. Mexico, Europe, Brazil, and Japan have stable coins, but all are rushing to the dollar. Movement in the monthly trade balance will be the best way to monitor success or failure of tariffs. As noted, the deficit was $122.6 billion in the last month, a 78% increase in one year. But the month before the most recent month the balance spiked to $130.7. There was a rush to buy imports before tariffs hit. It is hard to exactly measure success in correcting the trade deficit. Is a number below $100, 18% lower the number where victory can be declared? Or is it the trend, three months of improving numbers? No matter the case, US dollar devaluation may be a tool used to reduce the trade deficit. The mere mention of this, combined with 99% of stable coins being in US dollars, should make people move away from the dollar, start leaving the party. Perhaps find a new party in Mexico, Europe, Brazil, Japan, or elsewhere. This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit etherfuse.substack.com