US: Treasury lacks conviction in the strong USD policy - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that several commentators have argued that the US Treasury’s strong USD policy is well beyond its sell by date and President Trump makes no secret of the fact that he would favour a weaker USD in his quest to resort the US trade balance to health.

Key Quotes

 “A strong currency protects wealth.  It is also a desirable asset in the fight against inflation.  In recent years fears about disinflation and deflation have resulted in circumstances in which weak currencies have been favoured by many policy makers around the globe.  The result has been a focus on currency wars.  That said, for the past couple of decades the official policy preference of the US Treasury through successive administrations has been for a strong USD.  It was initiated in a period when US inflation rates were noticeably higher than current levels and the USD was trading at very weak levels vs. the JPY. Due to soft inflationary pressures in recent years, little reference was made to this policy by the previous administration.” 

“Recent comments by US Treasury Secretary Mnuchin in an FT interview confirm that he is reluctant to completely give up on the strong USD policy.  He remarked that “over long periods of time the strength of the dollar is a good thing” since “it’s a function of the confidence and the strength of the US economy.  However, these remarks came with a caveat.  Mnuchin stated his allegiance with the President’s view by remarking that “over short period of time the strength of the dollar creates certain issues that hurt our exports”.  In short, the Treasury lacks conviction in the strong USD policy but is keeping its options open.”