Trump administration has few tools to weaken the dollar
In early 2018, before an audience of chief executives and politicians at Davos, Steven Mnuchin got in trouble for saying the obvious: a weaker dollar would help US manufacturers export their products.
Mr Mnuchin, the US Treasury secretary, had cast a sliver of doubt on a policy held by administrations of both parties for over two decades, namely that when markets want the dollar to strengthen, the Treasury should stand by and allow it to. And so, like other Treasury secretaries before him, he was forced to clarify, confirming his commitment to a strong dollar.
On Monday, Mr Mnuchin was finally allowed to speak freely, declaring that China manipulates its currency to create an unfair competitive advantage, with the implication that the greenback is overvalued against the renminbi. The US Treasury is no longer bound by verbal rules of the strong-dollar policy.
It is not immediately clear, however, what the US can do about the strong dollar itself. Jawboning from President Donald Trump and his Treasury secretary is unlikely to work on its own, and it will be difficult for the Treasury to address the issue without help from both the Federal Reserve and the rest of the world’s central banks.
With varying degrees of intensity since the beginning of his administration, Mr Trump has urged Mr Mnuchin and Robert Lighthizer, the US trade representative, to be more aggressive about the dollar-renminbi exchange rate. More recently, Mr Trump has expressed frustration more broadly about the value of the dollar.
Declaring China a currency manipulator came after Beijing’s decision to allow the renminbi to depreciate to below 7 to the dollar. Brad Setser, a Treasury official under Barack Obama and now a fellow at the Council on Foreign Relations, called the move a “major rhetorical escalation”.
The White House is not escalating alone. Chuck Schumer, the top Democrat in the Republican-led Senate, called for action on the renminbi earlier on Monday and Senator Elizabeth Warren, a Democratic candidate for president, has already made a weaker dollar one of her campaign promises.
Ms Warren’s campaign did not respond to requests for examples of tools that would lower the value of the dollar, which points to a broader problem: there are no great tools.
“The dollar is overvalued now,” said Mr Setser, “because the US is the only major advanced economy with a central bank whose interest rates are significantly above zero.”
The broad real trade-weighted dollar — an index created by the Fed to track the dollar’s value against a wide range of trading partners, including China — moved higher in late 2014 and early 2015, as the European Central Bank and the Bank of Japan eased policy while the Federal Reserve went in the opposite direction and signalled that it was ready to tighten. After peaking in December 2016, it has remained elevated.
If the White House, the Treasury and a few Democratic senators want to do something about the dollar, they will need the co-operation of the Federal Reserve, which could weaken the currency by cutting rates more aggressively. So far, the dollar has brushed off the Fed’s abrupt embrace of easier monetary policy; after last week’s rate cut the dollar soared to a two-year high against its peers.
This continued strength comes as global central bankers begin — or signal a willingness — to ease monetary policy at a time when their policy rates are already at or close to zero. “Any kind of unilateral intervention is doomed to fail,” says Win Thin, global head of currency strategy at Brown Brothers Harriman. “It’s going to be impossible to get everyone else on board given that everyone else is running easy monetary policy.”
Fred Bergsten, a former Treasury official who was in charge of currency interventions under several presidents and is a founding director of the Peterson Institute for International Economics, argues that it is possible for the Treasury to make targeted purchases of specific currencies to drive up their values. He called the policy “countervailing currency intervention” and said it could act as a kind of “nuclear deterrent”, a threat to discourage other countries from manipulating their own currencies.
To be effective, however, Mr Bergsten’s deterrent would take better jawboning — consistent, clear communication of intentions on currency. Mr Trump’s administration has shown a willingness to jawbone. It has not, so far, shown the consistency that Mr Bergsten recommends. Currency markets understand by now that several tweets may not necessarily signal an enduring change in policy.
“[Mr Trump’s] ‘open mouth operations’ are likely to have only a transitory effect if not backed up by actual changes in policy”, said Barry Eichengreen, economics professor at the University of California, Berkeley. “Similarly Treasury intervention in the forex market, financed using the resources of the Treasury’s Exchange Stabilization Fund. These will have a lasting effect only if backed up by changes in other policies, by inter alia the Fed.”
Michael Bordo, a monetary historian and a professor of economics at Rutgers University in New Jersey, wonders what problem Washington is trying to solve. “Seems to me when you have a floating exchange rate, the value is to be determined by the market,” he said. Investors are looking for higher and safer returns in the US, and global central banks continue to hold more than 60 per cent of their allocated reserves in dollars.
“The reason our dollar won’t go down is that the dollar is the safe haven, and people will hold the dollar in a period of global uncertainty,” Mr Bordo said.