Macroscope | How Mnuchin’s words in Davos could send the US dollar spiralling
The Treasury Secretary hasn’t entirely disowned the strong US dollar mantra but his approach seems more nuanced. His problem is that markets don’t always do nuances
At last week’s World Economic Forum (WEF) in Davos, no one made US Treasury Secretary Steven Mnuchin refer to the benefits to the United States accruing from a weaker dollar. He chose to. Mnuchin may have added to the greenback’s existing woes by casting doubt over the Treasury’s long-standing adherence to a strong dollar policy.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin said on Wednesday. Although his comments overall were even-handed and he shouldn’t be accused of directly trying to talk the greenback down, Mnuchin doesn’t seem to be on the same page as many of his predecessors.
Mnuchin may have added to the greenback’s existing woes by casting doubt over the Treasury’s long-standing adherence to a strong dollar policy
As he said on a WEF panel on Thursday, presumably as part of an attempt to persuade markets that the importance of one comment on Wednesday had been overblown, Mnuchin nevertheless noted that his position “is perhaps slightly different from previous Treasury secretaries” who have argued for a strong US dollar. Mnuchin backs free and floating currencies.
That said, on Friday he told CNBC a strong “long-term dollar” is in US interests.
But by deviating, however subtly, from the straightforward strong US dollar mantra, Mnuchin has effectively let the currency market think it knows both that he himself has no issue with a weaker greenback in the short term and that the US government, which doesn’t like intervention by others in the currency market, would be a bystander to such a move.
“Ultimately, I want to see a strong dollar,” President Trump said on Thursday, arguably as part of a damage limitation exercise, but markets cannot have failed to notice his use of the word “ultimately.”
Trump may have decided to comment because if overseas investors perceive the US Treasury is institutionally calm about another fall in the greenback’s value, they could start to demand higher yields to compensate them for holding the depreciating currency just when the US government’s borrowing needs are on the rise following the passage of taxation reform in December.