Trade Wars: Weaker Dollar is Part of Trump Strategy
The US dollar is at a three-year low against global currencies, and it’s been heading further down recently in reaction to a comment from United States Treasury Secretary Steven Mnuchin that he welcomed that weakness as a blessing for US trade.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters, according to Bloomberg.
But Mnuchin also added: “Longer term, the strength of the dollar is a reflection of the strength of the US economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency.”
Meanwhile, Commerce Secretary Wilbur Ross, who, like Mnuchin, is in Davos to rub elbows with the global elite, said that “trade wars are fought every single day. The difference is the US troops are now coming to the ramparts.” President Donald Trump is expected to speak at Davos on Friday
The dollar had already been suffering from generalized fears of US protectionism—protectionist measures usually drive a currency down—but Mnuchin’s remark pushed it down further. The markets seem to believe that a weak dollar is Trump administration policy.
All this comes against a backdrop of new tariffs imposed by Trump against imported solar panels and washing machines, reports of unknown content submitted to the president by the Commerce Department on the national security implication of steel and aluminum imports, and a Commerce Department case on whether to take action against China for infringements of intellectual property.
A few months ago, the US slapped a 300-percent import tariff on Bombardier aircraft made in Canada. The NAFTA agreement is under threat as US negotiators have made little progress to revise the deal in a way that would reduce US trade deficits with Mexico and Canada.
Mnuchin’s comments on the strength or lack thereof of the dollar marked a departure from the usual stance of Treasury secretaries who traditionally have talked up the value of the greenback. A strong dollar enhances its role as a reserve currency. The global desire to hold dollars, or dollar assets, enhances the value of those assets. A weak dollar could boost the earnings of US multinationals, thanks to increased exports, but it would also make US assets less appealing, driving their prices down, while driving up the costs of imported goods for everyday Americans. Already the price of Treasury instruments has dropped and data show that China and Japan, the two largest holders of US Treasurys, have reduced their holdings.
Trump has also complained, last January, before the inauguration, that the dollar was “too strong,” so it’s reasonable to conclude, in light of the most recent developments, that a weak dollar is in fact administration policy.
But Mnuchin can’t have it both ways: he seems to want a wealk dollar in the short term and a strong dollar in the longer term. How short is his short-term horizon, and at what point will it be okay with him for the dollar to gain in strength, and why?
Mnuchin and Trump may find that, just as the president can’t control the entire federal government, he can’t dictate the market value of the dollar either. At some point traders may decide that the dollar has declined to the point where it’s worth buying again, driving up its value.
Then there is the policy of the Federal Reserve, which has embarked on a path of increasing interest rates, reflecting its confidence in a growing US economy. Higher interest rates make dollar assets more attractive, boosting the value of the greenback.
A weak dollar is a double-edged sword. It would most benefit the earnings of large multinational corporations and most hurt ordinary consumers. That doesn’t seem to be a policy worth pursuing.
The US economy is growing well, unemployment is down, and corporations just received the benefit of a massive tax cut. How much more stimulus is required, and to what end?
Mnuchin also said that the 10-strong US delegation at the Davos World Economic Forum, generally viewed as a bastion of globalization and free trade, was there to promote the administration’s “America First agenda.” Do they really expect the rest of the world to go along?
Not likely. The latest reporting out of Davos is that the eleven remaining Trans-Pacific Partnership nations have officially agreed to continue without the US and that “European leaders came to the defense of free trade and global cooperation,” in an effort to counterbalance Trump administration policies.