US: State of the strong USD policy in jeopardy? - BBH


Research Team at BBH notes that there had been some concern that the Trump Administration was going to jettison the more than 20-year strong dollar policy.  

Key Quotes

“Trump himself has been critical of many countries, including Japan, Germany, and China.  The targets are not so new.  They can be found in recent Treasury Department reports.  What is new is the tone and channel of communication.  Mnuchin makes it sound like it is primarily a stylistic rather than a substantive difference.”  

“Mnuchin appears to have given the nod to a strong dollar policy.  However, the way he did does not quiet all the doubts.   He said that the strong dollar reflected the confidence in the US and the outperformance of the US economy.  This is consistent with our emphasis on divergence as a major driver of the dollar.  He recognized that a strong dollar is not an unalloyed good, and in both the short and long-term, there are drawbacks and advantages.”  

“By linking the strong dollar to a level, Mnuchin demonstrates he does not quite get it.  The strong dollar policy was never about the level of the dollar.  After all, there have been large fluctuations in the dollar since Rubin initiated the strong dollar policy in 1995, and through it, the strong dollar policy has not been abandoned.  The strong dollar policy was meant as a signal to US trade partners and creditors that the US would no longer use the dollar as a weapon to get concessions as was the case from 1985-1995.   Until Mnuchin signals this element of the strong dollar policy, investors may not be completely comfortable with the US commitment.”  

“Of course, sometimes the Treasury Secretary must be a cheerleader.  Mnuchin is playing this role.  He claimed that the dollar's rally since November was a vote of confidence in Trump.  The opinion polls do not support this self-serving explanation.  In fact, the latest Quinnipiac University survey found that those thinking that Trump is a good leader has not fallen four percentage points below 46% of the popular vote he won.   There has been a dramatic deterioration in the difference between those who approve and those who disapprove Trump over the past month.  There was a 13 point gap in his favor, and now its is a 17 point gap against.”

“Also, we note that broad measure of the dollar has been trending higher since mid-2014.  It fell only one month in H2 14.   In 2015, there were only three months that the Fed's real broad trade-weighted dollar fall.  In 2016, the dollar fell in February-April and then rallied rest of the year, except for August when it fell by less than 1%.   The 2.3% rally last November was the largest monthly advance in the cycle, but not to include a role for monetary policy and for developments in Europe (like extending QE longer than expected) may make for good TV but not robust analysis.”

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