Mnuchin comment surprises financial markets, turns dollar decline into ‘one-way bet’
The CNBC news on January 24 2018:
- The dollar, already on a spiral lower, sank to a three-year low after Treasury Secretary Steven Mnuchin said a weaker dollar was good for U.S. trade.
- The comments depart from the strong dollar policy of Treasury secretaries before him, going back to Robert Rubin in the Clinton administration, but fit with the Trump administration’s “America first” message.
- The weak dollar policy could backfire and make U.S. assets like Treasurys less appealing, and drive up the costs of foreign goods for businesses and everyday Americans.
- “They basically open this up as a one-way bet for traders, and traders will keep pushing it and keep pushing it,” said one strategist
Treasury Secretary Steven Mnuchin’s comment that a weak dollar is good for the country accelerated a decline in the currency and fed fears in a market already speculating that White House may make the dollar less attractive for the longer term.
Mnuchin’s comments echo statements by President Donald Trump, who famously helped turn a market trend of a stronger dollar last January when he said, prior to his inauguration, that the dollar was “too strong” and that U.S. companies can’t compete because of it, particularly against the Chinese. The dollar index has lost more than 10 percent since then, and after Mnuchin’s comment Wednesday morning, it sank to a new three-year low.
The comments also depart from the policy of the past three presidential administrations and Treasury secretaries, going back to Robert Rubin, to support a strong dollar policy, at least publicly. Prior to Trump, presidents in recent history have refrained from talking the currency up or down.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos, according to Bloomberg, adding that the currency’s short-term value is “not a concern of ours at all.”
While the weak dollar could help U.S. exports, strategists point out it devalues all types of U.S. assets, including Treasurys, and makes the cost of goods from overseas more expensive for everyone from manufacturers to everyday Americans.
Whether a weak dollar policy was the intended message or not, the fact that Mnuchin made the comments at a briefing at the World Economic Forum’s annual meeting in Davos, Switzerland, was not lost on the market. The forum is viewed as the bastion of globalization and free trade, while Trump officials have been or are expected to reaffirm the administration’s America first policies, seen as protectionist by some.
Trump is expected to speak there later this week.
The dollar was already set on a downward course this year, and Mnuchin’s comments help cement that path. The euro rose to 1.239 per dollar, and yen gained about 1 percent Wednesday against the greenback.
“I think you could have a situation where cyclical forces come into play, and it snaps back, but for now, they’ve put a wild card on the dollar which could tell you that normal cyclical forces won’t operate,” said Robert Sinche, chief global strategist at Amherst Pierpont. “They basically open this up as a one-way bet for traders, and traders will keep pushing it and keep pushing it. … Who’s going to stand in front of it? It’s not a healthy global environment.”
The Trump administration, which this week slapped new tariffs on Asian washing machines and solar panels, sees a weaker dollar as a positive for American exporters. But on the other hand, the market has been worrying about the fact that central banks are clearly diversifying reserve holdings away from the dollar, and U.S. assets, like Treasurys could become less appealing.
“I think the dollar will stay the reserve currency. We’re too big and too influential, but does it mean people have to hold so many dollar assets if the administration says this is not a good place to hold your money, particularly with a trillion dollar deficit? There’s a long way down,” Sinche said.
Treasury Department data show that China and Japan, the two largest holders of U.S. Treasurys, reduced their holdings in November as the dollar weakened. Last month, the International Monetary Fund reported the dollar’s share of global currency reserves fell in the third quarter to 63.5 percent, its smallest since mid-2014.
Concerns about the U.S. debt was also stirred up by a report, quoting unnamed officials, that China was not as interested in buying Treasurys, but market pros say China has little alternative and relies on the U.S. Treasury market.
Mnuchin also spoke in favor of a strong 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.
But the fact he was so vehement on a weak dollar came as a surprise to some in the markets.
“It’s not good or bad. It’s a surprise and markets aren’t priced for it. There’s this pivot away from the U.S. dollar bull market. Part of it is driven by global reflation and part of it is driven by Trump,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities. McCormick said he did expect that type of rhetoric from the administration, and he also expects protectionist trade practices to be a negative for the dollar.
“It’s kind of scary stuff,” said Sinche. “Trade, trade, trade. They view everything through one lens.”
Stocks were lower in afternoon trading, giving up morning gains, and analysts said one factor was some concern about the dollar remark and the potential for protectionist U.S. actions. Treasury yields were higher but moved off highs of the day.
“Equities and risk assets continue to move along here,” said Sinche, before the afternoon stock sell off. “I would remind people the ’87 crash, the precipitating factor was an argument about supporting the dollar between Germany and the U.S.”
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