Talking about the dollar down, or is it up?
If there was a consensus at the beginning of the year, it was that the dollar will rise. Fund managers surveyed by Bank of America Merrill Lynch were overweight on the money (although they worried it was a full trade).
The stars seemed aligned in the evergreen’s favor. The Federal Reserve was poised to raise rates, while other major central banks maintained loose monetary policy; that should increase the attractiveness of the dollar in terms of output. The new Trump administration was ready to unveil fiscal stimulus and boost growth; that should encourage those who wanted to buy American stock or invest in American factories. And tax proposals designed to encourage American companies to repatriate overseas profits, giving the dollar another boost.
So why has the dollar retreated to a 12-week low? The main reason is the rhetoric of the new administration. Mr. Trump told the Wall Street Journal that
Our companies cannot compete with them (Chinese companies) now because our currency is too strong. And it’s killing us
As HSBC’s David Bloom said
Not only did this mark a break with the long-standing mantra that a strong USD is in the best interest of the US, but it threw out the convention that for the US Treasury, not the president, to discuss USD policy.
And it’s not just China that the new administration is complaining about. Mr Trump’s trade adviser, Peter Navarro, told the FT that
Germany…continues to exploit other EU countries besides the US with an undervalued ‘Deutsche Mark’
While it is true that Germany has a large current account surplus, only someone who has not read the paper for the past 15 years could argue that Germany has been ‘ try to move the euro down. Germany only accepted the euro as a price for further integration with the EU; he preferred to hang on the mark. The Bundesbank has consistently resisted additional stimulus from the European Central Bank. Wolfgang Schaeuble said that last year
It is undeniable that the policy of low interest rates is causing extraordinary problems for the banks and the entire financial sector in Germany
So does the Trump team think the euro is too weak? Marc Chandler of Brown Brothers Harriman points to another element in astronomy
Ted Malloch, widely tipped to be the next US ambassador to the EU (and currently a professor at Henley Business School at the University of Reading) is a Eurosceptic. He said he wanted to short the euro and said the eurozone could collapse in the next 18 months.
And then there’s Steven Mnuchin, the next Treasury secretary. He appeared to back away from Mr. Trump’s comments, saying
When the president-elect mentioned the US currency, it wasn’t meant to be a long-term comment
Too weak, too strong; who is he It all adds up to instability. This is Unicredit’s Vasileios Gkionakis on Navarro’s reporting
This is very strong and unusual rhetoric coming from a very senior trade advisor to the US president. First, and as it comes just days after the president’s comments about the dollar being “too strong”, it suggests that the US administration sees the exchange rate as one of the main anchor points for use its trade policies. importantly, it adds an additional layer of uncertainty and inconsistency to this tangled web of uncertain policies: a move toward a “weak dollar policy” is opposed to imposing tariffs (a tends to lead to exchange rate appreciation – regardless of the And needless to say, a stronger USD is difficult to reconcile with the creation and protection of manufacturing jobs at home.
It is worth noting, of course, that countries can talk down their currency but this can only work for a while. David Bloom from HSBC again
So it is possible that Trump will continue to tout the benefits of a weaker USD but rhetoric will lose its potency over time if not followed by action to deliver on that devaluation. One only has to look at the experience of Japan. Japanese policymakers rarely had a lasting impact with JPY strength in Q3 16 as it was never followed up with action.
The key is interest rate policy. Before the election, Mr Trump said Janet Yellen was keeping rates low for “political” reasons and should be “ashamed” of herself. Many people tended to ignore this rhetoric, arguing that Mr. Trump, whose companies have declared bankruptcy many times, would not like higher rates. But many in the Republican party have also been skeptical about Fed policy, especially regarding quantitative easing. there are two Fed vacancies to be filled and Ms Yellen’s term will run out in 2018 so new positions could push the central bank in a more hawkish direction.
But that would send the dollar up, not down. You cannot have a stronger economy, a more hawkish dollar and a weaker currency. But these tradeoffs have not yet been squarely addressed. In the meantime, markets are understandably confused.