Yellen pushed for strong dollar in reversing Trump-Era tone

Photographer: Alex Wong / Getty Images

Janet Yellen once praised the benefits of a weaker dollar for exports, but as the new Treasury Secretary, she is under pressure to return the US to a “strong dollar” policy – and may cause trembling on Wall Street if she does not.

The fall of the dollar this year – heading for its second-largest decline in the last year and a half – has already fueled concerns among foreign policymakers, thanks to the competitive advantage it gives the US. Even a tacit approval of a weakening dollar could create tensions with trading partners.

Yellen, President-elect Joe Biden’s choice of Treasury Chief, will take office about a month after her predecessor labeled two countries as currency manipulators and 10 on a watchlist for artificial interference, if confirmed. The moves, unveiled on December 16, closed a fleeting period for currency commentary under President Donald Trump’s administration, which increases focus on Yellen’s approach.

The US adopted a policy of favoring a “strong” dollar in 1995, ending frequent calls to other countries to raise their currencies. While the mantra evolved from one Treasury chief to another, no administration from then until the Trump years, as the president did in 2017, communicated that the dollar was getting “too strong.”

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

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It’s a sentiment that 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 Investors believe that the US central bank saw a weaker currency as a tool in addressing the country’s current account deficit. Ten years later, when she was chair of the Fed, she continued to make that connection by repeatedly saying that the appreciation of the dollar was holding back US exports.

A transition spokesman for Biden declined to comment on the Yellen and dollar policies.

It is the job of the Treasury Secretary to oversee currency policy, and at least two former holders of that title have urged Yellen to make it clear that she is not in favor of depreciating the dollar. That’s after Mnuchin went so far as to cherish Trump’s recital weaken by force in mid-2019.

Calls from pastors

“It would be unwise to appear actively devaluationist or indifferent to the dollar,” said Larry Summers, who served as Secretary of the Treasury under Bill Clinton and national economic adviser under Barack Obama. last month.

Summers emphasized that the dollar’s dominant role in the global financial system places the Treasury’s duty to handle its responsibilities carefully. Preferring a strong dollar is “cautious” for the new secretary, especially given Biden’s plans for an “expansionary policy,” said Summers, a paid contributor to Bloomberg.

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

“Interest rates are at all-time lows, and federal debt as a share of the economy is greater than it has ever been since the end of World War II,” Paulson wrote. “It is critical to bend the steep path of rising public debt. Otherwise, the dollar will eventually be cut. Washington will not be able to pay its bills. “

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Those aren’t the kind of concerns Yellen had to address during her tenure at the Fed, which began as a board member in the 1990s. Instead, she looked at how the exchange rate played on the economic outlook and what the implications were for determining monetary policy. The following comments illustrate a consistent takeover over time:

• “We have a huge current account deficit, which is a drain on demand in our economy. A lower dollar should eventually feed through to more demand, ”Yellen said in September 2004.
• The dollar’s decline from 2002 “will help to improve our yawning trade deficit and thereby offset some of the otherwise conflicting effects of tighter credit conditions,” Yellen said in December 2007.
• “The dollar has seen significant gains in the past year and a half,” says Yellen told lawmakers in December 2015. “The strength of the dollar is a factor that – means that monetary policy for the US is more likely to follow a gradual path.”
• “A stronger dollar has a depressing effect. It creates channels through which domestic demand is depressed. Right now, net exports will – for some time and probably in the future – slow US growth somewhat, “Yellen said. 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 a treasury secretary, the typical attitude is a strong dollar policy.”

The dollar’s exchange rate has been market-driven since the 1970s, and official comments usually have little more than a cursory impact on the dollar, but they are still closely monitored by foreign policymakers along with investors.

The rulings of the new government will be closely watched following the latest Mnuchin Treasury report on foreign exchange practices. For a quarter of a century, the US continued to declare any trading partner a manipulator of its currency.

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

Manipulator tag

Switzerland’s central bank quickly turned down Mnuchin’s request to cut back intervention in the franc. Taiwan, which is on the so-called monitoring list, said the treasury is misrepresenting its foreign exchange purchases.

On that point, Yellen previously provided a more understanding view of exchange rate movements. In 2019, she said, “It is really difficult and insidious to determine when a country is betting its currency to gain trading advantages.”

“She will likely advocate a high hurdle to both express and implement an active dollar policy and also to exercise caution when accusing trading partners of currency manipulation,” wrote Daniel Hui, a global foreign exchange strategist at JPMorgan Chase & Co . 14 report.