May 15, 2016 5:04 pm
Donald Trump tests strong US dollar mantra
Sam Fleming and Shawn Donnan in Washington
Donald Trump said this month that the strong US currency risked causing havoc for the economy
Donald Trump has drawn scorn from economists for his threats to launch a trade war with China and to renegotiate the terms of US sovereign debt. Less noticed, however, have been the Republican presidential candidate’s apparent threats to dismantle another decades-old American orthodoxy: the “strong dollar” policy.
The property developer has been consistent in recent months in warning against a strong exchange rate, even though the US has — notionally at least — adhered to a “strong dollar” policy since the 1990s.
In August last year Mr Trump declared the dollar was “hurting” the US and leading to “huge disadvantages” for companies’ competitiveness. “It sounds good to say ‘we have a strong dollar’. But that’s about where it stops,” he told one interviewer.
Mr Trump doubled down on that message earlier this month, saying that while he loved the concept of a strong dollar, it risked causing havoc for the US economy while delighting China, which he and others accuse of engaging in years of currency manipulation aimed at gaining a competitive advantage over American manufacturers.
To some in the Washington economic policy establishment this is dangerous talk.
Ted Truman, a fellow at the Peterson Institute for International Economics and former head of the Federal Reserve’s international finance division, said if the words become a key pillar of Mr Trump’s campaign, they could start to impact financial markets. “The best thing to do is say nothing at all,” he said.
US presidents have generally avoided commentary on the dollar or repeated variations of the phrase first coined by Mr Rubin in 1995 that “a strong dollar is in the interest of the United States”. The main reason is the view that it is counterproductive to try to fine-tune currency policy by attempting to talk up or down the value of dollar.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said there had been broad continuity in the US executive branch’s currency strategy through the Clinton, Bush and Obama regimes. “Trump could change that,” he added. Asked on Friday about Mr Trump’s comments on the dollar, Jack Lew, the treasury secretary, deployed his mantra that the strong dollar was a reflection of the US’s relative strength. “If other countries move towards competitive devaluation it will start a chain reaction,” he said at a Washington breakfast. “Pretty soon you are in a battle over shares of a shrinking global pie.”
Yet in reality, US officials’ strong dollar rhetoric has tended to accompany private concerns when a rising currency has been hurting US exporters. That has certainly been the case in recent years, with the dollar’s gains playing a role in inhibiting the Fed from increasing rates more rapidly.
In March 2015 Janet Yellen, the Fed chair, said the currency’s level reflected in part the strength of the US economy, but added that it was one reason for a weakening in export growth, which she expected to exert a “notable drag” on the economy. In March this year the Fed pared back its forecasts for rate increases, citing global economic and financial risks — central to which is a surging dollar.
The Fed was also accused of setting off an international currency war in the wake of the 2008 crisis after it used quantitative easing to increase the monetary supply, which had the effect of weakening the dollar.
“His symbolic delinking of dollar strength from US economic strength could have the salutary effect of liberating future presidential candidates and Treasury secretaries from having to make ritualistic commitments to a strong dollar”.