Mnuchin Praises Strong Dollar, Adds To Currency Confusion
Following today’s more dovish than most expected minutes, the dollar tumbled and its main carry counterpart, the yen spiked. However, shortly after 4pm, the USDJPY resumed its levitation, a time when the traditional trust bank intervention on behalf of the BOJ was not yet in play. The reason for the updraft in the dollar was the publication of an interview in the WSJ with Treasury Secretary Steven Mnuchin, his first since being sworn in as Treasury Secretary last week, in which he appeared to advocate a “strong dollar”, and said the strong U.S. currency “is a reflection of confidence in the U.S. economy”, adding that its performance compared with the rest of the world and was a “good thing” in the long run.
“I think the strength of the dollar has a lot to do with kind of where our economy is relative to the rest of the world, and that the dollar continues to be the leading currency in the world, the leading reserve currency, and a reflection of the confidence that kind of people have in the U.S. economy,” Mr. Mnuchin said.
Mnuchin’s remarks are notable because like in his confirmation hearing in January, he contradicts many other White House officials, including not only Trump’s key trade advisor Peter Navarro, but President Donald Trump himself, both of whom have suggested in the past that they favored a weaker currency to support the U.S. trade position.
The dollar has appreciated by 23% over the past three years and added to those gains since Mr. Trump’s November election; recent US export weakness and numerous disappointing corporate earnings results have been blamed on the stronger dollar. A stronger dollar goes against the very basis of Trump’s desire to make the US into an export powerhouse.
“For longer-term purposes, an appreciation of the dollar is a good thing, and I would expect longer-term, as you’ve seen over periods of time, the dollar does appreciate,” Mr. Mnuchin added.
It was the short term, however, that was far more interesting to FX traders whose P&L is updated on a daily, not decade basis
“In the short term, there are certain aspects [of a strong currency] that are positive about the dollar for our economy and there are certain aspects that are not as positive,” Mr. Mnuchin said. “A lot of the appreciation of the dollar since the election in particular is a sign of confidence in the Trump administration and the economic outlook for the next four years.”
It is unclear if that statement was a veiled pitch to begin selling the dollar.
As reported yesterday, perhaps it was the “short term” that Mnuchin was discussing when he held his first phone call with Christine Lagarde, and told the IMF’s managing director that he expects the IMF to provide “frank and candid” analysis of exchange rate policies.
As the WSj adds, the Treasury Department traditionally has been the leading voice from the U.S. on foreign exchange policy and notes that “the past several administrations have for the most part signaled support for a strong currency, even though at times an appreciation of the currency has hurt exports.” Of course that ignores the fact that it was the historic debasement of the dollar with the Fed’s various QE programs that provided the US with an extensive trade advantage for years against its main trading peers, who only joined the currency devaluation race far later.
Mnuchin deferred when asked about China’s currency and said he looked forward to “healthy bilateral relations” with the world’s second largest economy.
“There’s trade issues that will make sense to look at, and I think there’s investment issues that will make sense to look at,” he said. “There are many things that we will need to collaborate on.” Previously Trump said he would label China a currency manipulator on his first day as president, although he may have since changed his mind upon learning that for the past two years China was intervening to strengthen, not weaken, its currency in order to mitigate and prevent China’s historical capital outflows, which have so far resulted in over $1 trillion in capital flight.