Treasury Secretary Steven Mnuchin rocked markets Wednesday when he apparently endorsed a weaker U.S. dollar. The comments fueled speculation that the administration in Washington is attempting to depress the Federal Reserve Note to spur trade and boost the national economy.
Speaking to reporters at the World Economic Forum in Davos, Switzerland, the former Wall Street executive hinted his support of reversing the strong dollar policy of the last 25 years. He explained that the short-term value of the greenback is “not a concern of ours at all,” adding that “a weaker dollar is good for us as it relates to trade and opportunities.”
Mnuchin did concede that the long-term strength of the dollar reflects how strongly the U.S. economy is performing, and “that it is and will continue to be the primary currency in terms of the reserve currency.”
He doubled down on his comments in a later interview with the Financial Times. Mnuchin averred that his words were “completely consistent” with statements he has made before, and further noted that the claim that a lower dollar would help the U.S. on trade in the short-term is a “factual statement.”
Factual or not, the comments sent the U.S. dollar spiraling during the trading session. Not only did the dollar suffer its most significant daily decline since March 2017, it is also off to its worst start to a year since 1987, with a 3.2% year-to-date loss. The U.S. Dollar Index is now trading at a three-year low of under 90.0.
Commerce Secretary Wilbur Ross tried to alleviate the damage by blaming the media for mischaracterizing Mnuchin’s remarks. He told CNBC:
“I think what he exactly said is the dollar, just like the Treasury bond market, is a huge market, a very liquid market. It's not something we worry a lot about day by day.”
Administration Unsure What Path to Take
It remains unclear if President Donald Trump and his administration will abandon the resilient dollar that has been in place since the days of Robert Rubin. In the years of President Bill Clinton, Rubin initiated the rule after his predecessor, Lloyd Bentsen, took advantage of the exchange rate to encourage Japan to open its markets. Since then, the White House has embraced a durable currency.
At the start of the 2016 campaign trail, Trump espoused the importance of having sound money. Towards the end of the presidential election, the real estate billionaire mogul flirted with the idea of weakening the currency.
Trump told The Wall Street Journal:
“I like a dollar that’s not too strong. I mean, I’ve seen strong dollars. And frankly, other than the fact that it sounds good, lots of bad things happen with a strong dollar. I do like low interest rates. I mean, you know, I’m not making that a big secret. I think low interest rates are good.”
Mnuchin has also teetered back and forth on the dollar. In February 2017, the Treasury Secretary called the appreciation of the dollar “a good thing,” but then tergiversated in August, arguing that “having a weaker dollar is somewhat better for us."
President Trump came to the aid of Mnuchin on Friday. Speaking to CNBC in Davos, Trump said that he wants a strong dollar and that Mnuchin's remarks were taken out of context by the press.
He told the business news network:
"The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar. Our country is becoming so economically strong again and strong in other ways, too."
Textbook economics dictates that a robust currency allows you to purchase more goods at a lower cost. On the other hand, depreciating money gives you the opportunity to boost your exports since other countries can buy your wares at a decreased price. If the White House wants to increase American trade, then the greenback’s value would need to deteriorate, but this would hurt foreign holders of U.S. debt.
Strong Dollar is Good for Americans
The U.S. imports a lot of goods. Thanks to the resurgence of the Federal Reserve Note in recent years, and central banks devaluing their own currencies, consumers have been able to purchase cheap products.
Considering that half the country lives paycheck to paycheck, wages have not kept up with the cost of living, and the consumer price index (CPI) has topped 2%, Americans have received foreign aid in the form of discounted goods.
An inferior dollar would only apply added upward pressure on domestic prices. With signals that price inflation is beginning to ramp up, it is crucial the administration dumps the idea of debasing the dollar. Even using it as a trade negotiating chip is a foolish idea, especially with reports that the Chinese government is considering stopping or slowing down its purchases of U.S. debt.
Moreover, the dollar hegemony in international markets is being threatened. The likes of China, Russia, and Germany are all starting to make room for other currencies. If the greenback is losing its global prestige, then what incentive would Beijing or Moscow have to reverse their new monetary attitudes?
A country cannot be made great again by destroying its currency. The U.S. dollar already shed about 10% of its value in 2017. The president must resist the temptation of eroding it any further. Otherwise, he risks hurting the economy, the federal government’s finances, and the well-being of Americans.
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