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

Photographer: Alex Wong / Getty Images

Janet Yellen announced the benefits of a weaker greenback for exports, but as the new Secretary of the Treasury, she faces pressure to return the United States to a “strong dollar” policy, and if not can cause tremors on Wall Street.

The fall of the green dollar this year (heading for the second largest fall in the last decade and a half) has already provoked the concerns of foreign policy makers, thanks to the competitive advantage it offers in the United States. and a whole tacit endorsement of a weakening dollar could provoke tensions with trading partners.

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

The U.S. adopted a policy of favoring a “strong” dollar in 1995, ending regular calls for other countries to increase their currencies. Although the mantra evolved from one head of the Treasury to another, no administration from then until the Trump years reported, as the president did in 2017, that the dollar was “getting too strong”.

While they sometimes backed a strong dollar, always from a long-term perspective, Trump and outgoing 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.

From the QuickTake archive: how a Trump tweet removed the policy of strong dollars

It’s a feeling Yellen herself has suggested she shared in the past.

As president of the Federal Reserve Bank of San Francisco in 2004, Yellen helped establish a opinion among investors that the U.S. central bank viewed a weaker currency as helping to cope with the country’s current account deficit. As president of the Fed a decade later, she continued to establish that connection, repeatedly saying that the appreciation of the dollar posed an obstacle to U.S. exports.

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

The Secretary of the Treasury’s job is to oversee foreign exchange policy, and at least two former holders of that title have urged Yellen to make it clear that it does not favor the depreciation of the dollar. This happened after Mnuchin came to entertain Trump’s consideration forcibly weaken the dollar in mid-2019.

Calls from predecessors

“It wouldn’t be prudent to look actively devalued or indifferent to the dollar,” said Larry Summers, who was Bill Clinton’s Treasury Secretary and Barack Obama’s national economic adviser. last month.

Summers stressed that the dominant role of the dollar in the global financial system is the responsibility of the Treasury to carefully manage its responsibilities. Favoring a strong dollar is “prudent” for the new secretary, particularly 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, stated the same in an opinion column in the Wall Street Journal this month.

“Interest rates are at record lows and federal debt is larger as a share of the economy than at any time since the end of World War II,” Paulson wrote. “It is very important to double the strong trajectory of the increase in national debt. Otherwise, the dollar will end up being degraded. Washington will not be able to pay its bills. “

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

• “We have a huge current account deficit, and that is a wear and tear of demand in our economy. A lower dollar would ultimately generate more demand,” Yellen said in September 2004.
• The fall of the dollar since 2002 “will help improve the open trade deficit and therefore offset some of the adverse effects of tighter credit conditions,” Yellen said in December 2007.
• “The dollar has strengthened quite a bit over the last year and a half,” Yellen said He told lawmakers in December 2015. “The strength of the dollar is an important factor: it means that US monetary policy is more likely to follow a gradual path.”
• “A stronger dollar has a depressing effect. It creates channels through which domestic demand is depressed. For now, net exports, then, for quite some time and probably in the future, will be a bit of a drag on U.S. growth, “Yellen told 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 stance is a strong dollar policy.”

The dollar exchange rate has been set by the market since the 1970s, and official comments don’t usually have a fleeting impact on the greenback, but they are still seen closely by foreign policymakers and investors.

The new administration’s statements will be looked at closely after the Mnuchin Treasury’s latest report on foreign exchange practices abroad. For a quarter of a century, the United States suspended the declaration of any trading partner as a manipulator of its currency.

Mnuchin 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 demand because it was reducing intervention in the franc. Taiwan, which is on the so-called checklist, said the Treasury inaccurately represented its foreign exchange purchases.

In this regard, Yellen has previously indicated a more comprehensive view of exchange rate movements. In 2019, he said: “It is really difficult and treacherous to define when a country plays its currency for trade advantages.”

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