Did Mnuchin Signal a Policy Shift Today?:BBH

Did US Treasury Secretary Mnuchin signal a change in the US dollar policy?  Probably not. As Mnuchin and President Trump have done before, a distinction was drawn between short- and longer-term perspectives.  In the short-term, a weaker dollar says Mnuchin, is good for US trade and “other opportunities”.  In the longer-term, Mnuchin explicitly acknowledged, “the strength of the dollar is a reflection of the strength of the US economy.”

The market chose to focus on the first part of the comment because it was already selling dollars and this offered justification at an important inflection point.  The dollar has strung together a 4-5 week slide despite macroeconomic conditions,  including strong growth, tax cuts, the relative and absolute increase in interest rates, and the anticipation of additional Fed tightening, usually associated with a stronger dollar.

Mnuchin unknowingly pushed on an open door.  “Unknowingly” because it did not break new ground, and Commerce Secretary Ross tried clarifying the statement relatively quickly.   Mnuchin may have been the most surprised by the impact of his comments.  One gets a sense that he is still learning the nuances of his position, and, perhaps, the disdain to which the Administration holds mainstream media, obscured how the media and markets hang on every word of the Treasury Secretary, especially about the dollar.

In some ways, Mnuchin’s precise meaning is unimportant.  The point is that they were said within an important context.  The Trump Administration just levied protective tariffs on solar panels and washing machines.  It is expected to decide soon on steel and aluminum.  President Trump has threatened action on China’s intellectual property rights violations as well.

Yesterdays (01/23/18) Reaction

The US is blocking the appointment of judges for WTO panels, which will jeopardize the conflict resolution mechanism (the teeth) of trade practices.  Although President Trump has suggested that the NAFTA talks are progressing, many still fear that the talks will collapse due to US demands or withdrawal, as the President has threatened.

Through the mid-1990s, the US and other countries habitually wanted directly influence the foreign exchange market.  Countries sought competitive advantage.  However, beginning with Rubin’s “strong dollar policy,” best practices evolved toward letting markets determine exchange rates.  This is now the official position of the G7 and G20.   In effect, the foreign exchange market was de-weaponized.

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