Yellen pressed to support the strong dollar in reversing the Trump-Era tone

Photographer: Alex Wong / Getty Images

Janet Yellen once argued the benefits of a weaker green dollar for exports, but as secretary of the Treasury, she is facing pressure to bring the US back to a “strong dollar” policy – and if she doesn’t, it could cause shaking. on Wall Street.

The fall in the green dollar this year – heading for the second-largest decline in a decade and a half – has already raised concerns about foreign policy makers, thanks to the competitive advantage offered by the US Even the tacit approval of a dollars in weight loss. could stimulate tensions with trading partners.

Yellen, the election of President-elect Joe Biden as head of the Treasury, if confirmed, will take office about a month after her predecessor labeled two countries as currency manipulators and named 10 on a watch list for artificial interference. The moves, unveiled on December 16, have limited a volatile period for currency commentary under President Donald Trump’s administration, which is stepping up its focus on Yellen’s approach.

The United States adopted a policy of favoring a “strong” dollar in 1995, marking the end of regular calls for other countries to increase their currencies. As the mantra evolved from one Treasury chief to another, no administration from then until the Trump years communicated, as the president did in 2017, that the dollar was “getting too strong.”

Although they sometimes backed a strong dollar – always from a long-term perspective – Trump and Treasury Secretary Steven Mnuchin said a weaker currency would help U.S. exports. Mnuchin also said he could have an “excessively strong dollar” short-term negative effects on the US economy.

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It is a feeling that Yellen herself has suggested to share in the past.

As president of the Federal Reserve Bank of San Francisco in 2004, Yellen helped set up a the opinion among investors that the US central bank saw a weaker currency as an aid in addressing the country’s current account deficit. As president of the Fed, a decade later, she continued to establish this link, repeatedly saying that the appreciation of the dollar is an obstacle to US exports.

A spokesman for the Biden transition declined to comment on Yellen’s and the dollar’s policy.

The task of the Secretary of the Treasury is to oversee foreign exchange policy, and at least two former holders of this title have urged Yellen to make it clear that he does not favor the depreciation of the dollar. That’s after Mnuchin went so far as to distract Trump forcibly weakens the dollar in mid-2019.

Predecessor calls

“It would not be wise to seem actively devalued or indifferent to the dollar,” said Larry Summers, who was Treasury Secretary under Bill Clinton and national economic adviser under Barack Obama. last month.

Summers stressed that the dominant role of the dollar in the global financial system is the task of the Treasury to carefully manage its responsibilities. Favoring a strong dollar is “prudent” for the new secretary, especially given Biden’s plans for “expansionary policy,” said Summers, who is a paid contributor to Bloomberg.

Hank Paulson, who served as Secretary of the Treasury under George W. Bush, mentioned the same point in a Wall Street Journal opinion column this month.

“Interest rates are at historic lows, and the federal debt is higher in the economy than at any time since the end of World War II,” Paulson wrote. “It is extremely important to follow the steep trajectory of the growing national debt. Otherwise, the dollar will eventually be degraded. Washington will not be able to pay its bills. “

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These are not the kinds of concerns Yellen had to focus on during his tenure at the Fed, which began in the 1990s as a board member. Instead, it looked at how the exchange rate took into account the economic outlook and what the implications were for monetary policy. The following comments illustrate a consistent takeover over time:

• “We have a huge current account deficit and this is a drain on demand in our economy. A smaller dollar should ultimately help increase demand, ”Yellen said in September 2004.
• The fall of the dollar in 2002 “will help improve our negative trade deficit and thus offset some of the contractionary effects of tighter credit conditions,” Yellen said in December 2007.
• “The dollar has strengthened quite a bit in the last year and a half,” Yellen said he told lawmakers in December 2015. “The strength of the dollar is a factor – it means that monetary policy for the United States is more likely to follow a gradual path.”
• “A stronger dollar has a depressing effect. Creates channels through which domestic demand is depressed. At the moment, net exports – well, for quite some time and probably in the future, will be somewhat of an obstacle to US growth, “Yellen said in a statement. June 2016.

“Yellen, as a Fed person, can talk about the benefits of a weaker dollar in terms of inflation and exports,” said Brad Bechtel, global head of foreign exchange at Jefferies LLC. “But as Secretary of the Treasury, the typical position is a strong dollar policy.”

The dollar exchange rate has been set by the market since the 1970s, and official comments tend not to have more than a passing impact on the green dollar, but are still closely watched by foreign decision-makers, along with investors.

The statements of the new administration will be carefully observed after the latest report of the Mnuchin Treasury on foreign exchange practices abroad. For a quarter of a century, the US has been reluctant to declare any trading partner a manipulator of its currency.

Mnuchin has applied this label three times – for China from August 2019 to January and, in Wednesday’s announcement, for Switzerland and Vietnam.

Manipulator label

The Swiss central bank quickly rejected Mnuchin’s request to reduce its intervention in francs. Taiwan, which is on the so-called watch list, said the Treasury misrepresented its foreign exchange purchases.

Regarding this score, Yellen previously indicated a more understanding view of exchange rate movements. In 2019, she said: “It is really difficult and treacherous to define when a country plays its currency to get trade advantages.”

“It will likely stand in the way of both expressing and implementing an active dollar policy and of being cautious in accusing trading partners of currency manipulation,” wrote Daniel Hui, global foreign exchange strategist at JPMorgan Chase & Co. . 14 report.