WASHINGTON — Treasury Secretary Steven Mnuchin appears to have learned a lesson that many of his predecessors also came to recognize: A Treasury secretary must tread delicately when discussing the dollar.
When Mnuchin suggested Wednesday at a global economic forum in Davos, Switzerland, that a weak dollar would benefit the United States, the U.S. currency fell in value and sparked concerns in global markets. A day later, Mnuchin tried to soften his comments. So did President Donald Trump, who stressed that “ultimately, I want to see a strong dollar.”
The two-day kerfuffle was a sign of how sensitive an issue the dollar’s value can be. Here are some questions and answers about the dollar and its relationship to the U.S. economy:
Q: What’s been the policy of recent administrations concerning the dollar?
A: In 1995, when Robert Rubin became Treasury secretary in the Clinton administration, he adopted the approach of always affirming that a strong dollar is in the best interests of the United States. From his years leading Goldman Sachs, Rubin knew that currency traders were alert for any variations in an administration’s views on the dollar and were ready to dump dollars at the first sign of diminishing support for the U.S. currency.
A lower-valued dollar can be worrisome, in part because it makes U.S. imports costlier and so can accelerate inflation, sometimes to worrisome levels.
Rubin’s mantra worked so well that it was adopted, usually word for word, by the six Treasury secretaries who followed him, in both Democratic and Republican administrations.
When Mnuchin deviated to suggest that there were advantages for the United States in having a weaker dollar, the market reaction was swift. The currency fell to a three-year low against the euro and sank against the Japanese yen.
On Thursday, Mnuchin sought to clarify his view. He said that in the short term, there were “obviously benefits” from a weaker dollar. These include making U.S. goods less expensive for foreign buyers and thereby benefiting U.S. companies and reducing America’s trade deficit. But Mnuchin added, “In the long term, I fundamentally believe in the strength of the dollar.”
Q: Is it inconsistent to say you prefer a weak dollar on a short-term basis and a strong dollar on a long-term basis?
A: Yes, but Mnuchin appeared to be trying to have it both ways. The U.S. economy was hurt in 2016 when a rising dollar and a weak global economy cut into American exports, causing an already high U.S. trade deficit to rise further.
Q: What are the benefits of a weak dollar?
A: A weak dollar means a shirt made in China and sold at Walmart will be more expensive for American consumers. In that way, it gives a competitive advantage to American shirt makers. In addition, a weak dollar makes an American good exported and sold overseas more affordable for foreigners.
Q: What about the drawbacks of a weak dollar?
A: By making foreign goods more expensive in the United States, it raises the risk of high inflation. It raises, for example, the cost of foreign-made products, like auto parts, that U.S. manufacturers need to produce goods. U.S. automakers depend heavily on foreign-made parts.
A falling dollar also makes foreign investment in dollar-denominated assets less attractive. So the sale of U.S. stocks and bonds to foreign investors can suffer. That can be a serious problem at a time when the budget deficit is rising sharply and is expected to once again approach and exceed $1 trillion annually in coming years. Of the government’s $20.5 trillion in debt, $5.7 trillion in is government trust funds such as Social Security. The rest — $14.8 trillion — is held by investors. And of the debt held by investors, over 40 percent is held by foreigners, with the largest amounts in the hands of China and Japan.
Q: If foreign investors slowed their investments in U.S. stocks and bonds, what could happen?
A: It could cause the booming stock market to slow its climb or possibly even retreat if the cutback in stocks was big enough. For bonds, it could send U.S. interest rates, which have been low for a decade, rising. That could dampen economic growth and add billions to the cost of financing rising government deficits.
Q: Is the prospect of a smaller trade deficit worth all of that?
A: Most economists don’t think so. But they note that Mnuchin’s comments in support of a weaker dollar came in the same week that the administration imposed tariffs on imported solar panels and washing machines — the latest move in its “America First” trade policy. Just as the punitive tariffs could trigger retaliation by other countries against American goods, any effort to talk down the dollar’s value could lead other nations to try to lower their currencies’ values.
“That just leads to chaos,” said Mark Zandi, chief economist at Moody’s Analytics. “Market forces should determine the value of a currency, not policymakers.”
Q: Is it possible Mnuchin’s comments were inadvertent and not the start of any concerted administration effort to reduce the dollar’s value?
A: Yes. In addition to Mnuchin’s own clarifying comments Thursday, Trump in an interview with CNBC said he thought Mnuchin’s comments had been taken out of context.
“I’ll tell you where I stand, which is ultimately very important,” Trump said. “Number 1, I don’t like talking about it because frankly nobody should be talking about it. It should be what it is. It should be based on the strength of the country.”
Trump said that with the U.S. economy doing well, “the dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.”