The Trump administration declared a surprising war on the U.S. dollar on Wednesday, breaking from a long tradition in which top American officials generally voice support for a strong American currency.
Speaking at the World Economic Forum in Davos, Switzerland, Treasury Secretary Steven Mnuchin shocked Wall Street by lauding the impact a weaker dollar can have on U.S. companies as it makes exports cheaper for other countries to buy.
“Obviously, a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. Mnuchin said recent declines in the value of the dollar against other currencies were “not a concern of ours at all.”
The dollar continued its recent descent following Mnuchin’s remarks. It’s now down about 10 percent against a basket of other currencies since last January, when President Donald Trump said the greenback was “too strong,” making it hard for U.S. companies to compete against China and other countries.
The currency decline has puzzled some economists and Wall Street traders because the dollar generally rises in value as the economy improves and the Federal Reserve increases interest rates. Yields on U.S. Treasury debt are currently rising as the Fed shifts policy. Rising yields usually make the dollar more attractive to investors, but the greenback keeps dropping.
U.S. presidents and Treasury secretaries have a long tradition of declaring their allegiance to a strong dollar policy in public remarks, even if privately many welcomed a softer dollar to boost U.S. exports and reduce trade deficits.
If the U.S. is publicly supporting a weak dollar while also imposing tariffs on foreign imports — as the Trump administration did this week — it could invite retaliation from other countries, potentially sparking both currency and trade wars, economists say.
“It’s remarkable, really, this kind of bomb-throwing from Mnuchin on the dollar the same week they slap on tariffs,” said Ian Shepherdson of Pantheon Macroeconomics, referring to action this week by the Trump White House to impose tariffs on some imported solar panels and washing machines. “The problem with this is it just invites retaliation. This is not a friendly action.”
A weaker U.S. dollar, while potentially a boost for exports, makes many foreign consumer goods more expensive for Americans to buy. That could hit lower-income consumers the hardest, including less well-off voters in Trump’s political base. Retaliatory tariffs on U.S. exports could also hurt domestic manufacturers.
The concept of a public strong-dollar policy dates back at least three administrations to when Lloyd Bentsen and Robert Rubin served as Treasury secretaries under President Bill Clinton. The general approach reflects the belief that a stronger dollar improves the value of U.S. Treasury bonds, equities and other dollar-denominated assets and gives Americans more purchasing power. It also generally reflects an improving U.S. economy.
“I have been consistent in saying, as my predecessors have said, that a strong dollar is good for the United States. If you look at the U.S. economy right now, the truth is our economy is performing quite well,” then-Treasury Secretary Jack Lew said in January 2015, echoing the regular public refrain of U.S. officials.
Mnuchin did nod to this tradition in his Davos comments after remarking on the benefits of a weaker dollar. “Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.
In addition to breaking with tradition, Mnuchin’s comments are at odds with the “King Dollar” view of some of Trump’s biggest economic supporters. Larry Kudlow, the economist and commentator often mentioned as a potential successor to Gary Cohn as National Economic Council director, has repeatedly advocated a strong dollar policy.
“If you look at periods of dollar weakness, especially the 1970s but also the 2000s, a sinking dollar is usually associated with rising inflation, higher interest rates and damage to the economy,” Kudlow wrote last year. “Under these circumstances, investors at home and abroad lose confidence and take their money elsewhere.”
Mnuchin’s remark at Davos also seemed to contradict his own statements from last year when he attempted to clean up Trump’s remark that the dollar was getting too strong. At the time, Mnuchin said in an interview with the Financial Times that Trump was “absolutely not” trying to talk down the value of the dollar.
Publicly supporting a lower dollar carries other economic risks, including driving investors away from other assets.
“You run the risk of not just talking down the dollar but talking people out of buying U.S. equities and U.S. bonds as well,” said Jim O’Sullivan of High Frequency Economics. “You can end up with higher interest rates and lower equity prices. It’s really playing with fire.”
Former Obama administration officials also noted that seemingly throw-away comments from a U.S. Treasury secretary on the value of the dollar risk undermining the ability of the administration to effectively intervene on behalf of the currency when it’s deemed necessary to boost the economy. The dollar was already falling ahead of Mnuchin’s comments, rendering the remarks possibly unnecessary.
“It’s cheap talk. It’s not connected to a broader, coherent approach to policy or to international coordination around that policy,” said Jason Furman, who served as chair of the Council of Economic Advisers under former President Barack Obama. “That devalues your ability to intervene in the future when it’s ever needed.”