Treasury Secretary Steven Mnuchin caught markets off guard this week by telling the truth about the dollar.
When Steven Mnuchin praised the virtues of a weaker dollar on Wednesday in Davos, Switzerland, he was instantly accused of launching “a surprising war on the U.S. dollar” and “breaking from a long tradition in which top American officials generally voice support for a strong American currency.”
So what were the words that launched a war on America’s currency?
“Obviously a weaker dollar is is good for trade,” Mnuchin said.
The dollar promptly fell by about 1 percent, to its lowest level in three years. Bond prices fell, pushing the yield on the benchmark 20-year Treasury note to 2.66 percent, its highest level since 2014. Gold surged. Wall Street analysts screeched that a “weak-dollar policy” risked sparking a “crisis of confidence.” The editorial board of the Wall Street Journal complained that “Mnuchin and Trump want to reduce U.S. purchasing power” by “making the dollar weak again.”
Then something truly unusual happened. Instead of backing away from his remarks, Mnuchin appeared to double down. He defended his comments as consistent with his earlier remarks and downplayed the idea that he should be touting a “strong dollar.”
“In the short term, where the dollar is is not a concern of mine and it is not something I spend a lot of time thinking about. There are benefits and there are costs of where the dollar is, depending on which side of the table you are on,” Mnuchin said.
Mnuchin was certainly right that his comments in Davos were “balanced and consistent” with his past comments. Back in August, he had said almost exactly the same thing.
“Obviously, the short-term issues of the dollar have both positive and negative impacts for different parts of the economy,” Mnuchin said in an interview on CNBC. “Obviously, as it relates to trade, having a weaker dollar is somewhat better for us.”
Those remarks also prompted a sell-off of the dollar.
Mnuchin then and now was merely echoing what President Donald Trump had already said, complaining in both April and August that the dollar was “too strong.”
Then, as now, Mnuchin also pointed out that the longer-run trend was for the dollar to go higher because of the strength of the U.S. economy. “In the long term, the dollar’s strength reflects the U.S. economy,” he said in Davos Thursday.
Here’s Mnuchin in August: “I do think over long periods of time, the dollar’s strength is an indication of the reserve currency and the confidence people have in the U.S. economy.”
It’s not Mnuchin’s comments that are surprising. It’s the ability of Wall Street and journalists covering Mnuchin to continue to be surprised by the them. Insanity is sometimes said to be defined as doing the same thing time and again while expecting different results. Perhaps it is a milder form of mental disorder to keep asking Treasury Secretary Mnuchin the same question about the strength of the dollar and be continually surprised that his answer does not change.
In fairness to markets and journalists suffering from confusion over Mnuchin’s consistency, for decades Treasury Secretary’s have seldom deviated from saying that the U.S. backs a “strong dollar.” And when they do go “off-script, they usually swiftly back away from anything that could be interpreted as “talking down the dollar.” When markets reacted with horror to George W. Bush’s Treasury Secretary John Snow saying he “was not particularly concerned” about the weakness of the dollar in 2003, the administration quickly backed down and said it continued to believe in a “strong dollar policy.”
Another source of flummox for journalists and Wall Street types is that very few understand the administration’s view of trade, economics, and the role currency plays in both. Too often the administration’s policies are viewed in isolation and through simplistic slogans such as “protectionism.” This leads to analysts wondering why an administration that is pushing for foreign investment in the U.S. would simultaneously weaken the dollar, which lowers the value of profits earned in the U.S. to foreign investors.
But as common this kind of point, mumble, and shudder approach might be in reaction to Trump administration actions, it is not very helpful. A bit of analytical thinking reveals the inner-consistency of the administration’s policies. Mnuchin subscribes to the view that the Trump administration’s massive corporate tax cuts, somewhat less massive personal income tax cuts, and far-reaching deregulatory push will accelerate the U.S. economy. This makes the U.S. a very attractive place for foreign investment, as revealed by the recent PwC poll of CEOs who now say the U.S. is by far and away the best place to invest for growth.
Enthusiasm about the growth potential for the U.S. economy, however, is likely to strengthen demand for the dollar. That makes U.S. produced goods less competitive, makes foreign goods cheaper, and acts as a brake on economic acceleration. In effect, the benefits of the pro-growth policies of the U.S. get shared with the rest of the world by the mechanism of currency appreciation and direct leakage from rising imports.
So what the administration is trying to do with its nonchalance about dollar weakness is to counter this tendency of exchange rate fluctuations to spread rising U.S. wealth across the globe.
There’s also a peculiar–and widely overlooked–feature of foreign investment in the U.S. that makes a weak dollar policy attractive to the Trump administration. Although many foreign-owned manufacturers have plants in the U.S., many of those still import intermediate goods and parts from their home countries or developing nation manufacturing bases. Dollar weakness versus foreign currencies makes these arrangements less profitable, encouraging companies to locate more and more of the manufacturing process in the U.S. This effect is bolstered by the fact that the administration can credibly threaten trade sanctions against nations that run large trade surpluses with the U.S.
Given the economic logic of the administration’s stance, it may be that calling its policy a “weak dollar” stance is a misnomer. After all, the purpose of the policy is to keep a larger share of America’s revived economic greatness at home. Let’s just call it an “America first” dollar policy.