Why the U.S. Strong-Dollar Policy Is Relic of Long-Gone Era: Q&A

  • Greenback’s rise has worked against Fed’s policy efforts
  • Trump has said strong dollar sounds better than it really is

The so-called strong-dollar policy has been a mantra of U.S. Treasury departments for more than two decades. Now, with Donald Trump and Hillary Clinton being anointed as the respective Republican and Democratic presidential nominees, America’s currency doctrine is due for a rethink. 

The greenback has surged around 20 percent since mid-2014, and speculation has been rife this year that global policy makers might reach a coordinated currency pact to weaken the dollar. Group of 20 finance ministers and central bankers gather in China later this week amid a storm of conditions that have kept the dollar strong, including the Brexit vote and weak global growth.

1. What is the policy?

Ever since then-Treasury Secretary Robert Rubin in 1995 began promoting the dogma that a strong dollar is in the U.S.’s interest, every administration has followed suit. Now the policy -- left over from a world before the G-20 agreed to refrain from currency manipulation -- has become inescapable, says Eswar Prasad, whose 2014 book “The Dollar Trap” makes the case that the greenback will remain the cornerstone of the global economy.

“It’s difficult for a Treasury secretary to say they don’t want a strong dollar, because that will be seen as a sign of economic weakness,” Prasad says.

2. Who is it good for?

The policy is underpinned by the ideology that a strong dollar reflects a strong U.S. economy. That faith, in theory, induces foreigners to buy Treasuries without fear of currency losses over time. It also means that American consumers get more for their buck in imported goods, although multinational companies suffer when a rising greenback erodes the value of sales abroad.

For the rest of the world, a strong dollar is a mixed blessing. Many central banks and foreign investors get a safe haven in U.S. government debt, which leaves room for countries in Europe and in Asia to keep their currencies weak, boosting growth. This is a role that’s not sustainable, Prasad says.

Emerging markets like India suffer: A surging dollar makes dollar-denominated debt harder to repay.

3. Does the policy still exist?

The growing role of central banks in managing the global economy may have killed the U.S.’s strong-dollar policy, according to Fred Bergsten, the founding director of the Peterson Institute for International Economics in Washington, who served as an assistant Treasury secretary in the Carter administration.

While the Treasury’s policy toward the greenback has been “totally laissez-faire,” Bergsten says that “to the extent that there’s a revealed preference from the Treasury -- particularly in the decade of manipulation but even more lately -- it’s to let the dollar go down, not to push it up by strong dollar rhetoric.”

The Treasury Department responded to inquiries about the policy by referring to Secretary Jacob J. Lew’s comments in a CNBC interview aired June 27, days after the U.K. voted to leave the European Union, in which he repeats the Rubin-era mantra:

“I have long taken the view, as have my predecessors, that a strong dollar reflects a strong U.S. economy. And it’s in the U.S. interest.”

4. How does the Fed feel about it?

While a strong dollar helped hold down price gains in the 1990s, over the last two years a rising greenback has made Federal Reserve Chair Janet Yellen’s job harder. Its trajectory is working against her efforts to spur inflation, which has undershot the Fed’s target since May 2012. It’s also, as she said in June, depressing domestic demand and pulling down net exports, which Yellen sees being a “drag on U.S. growth.”

The currency’s behavior has become a key consideration for the Fed, says Daragh Maher, New York-based head of U.S. currency strategy at HSBC Holdings Plc. “I’m betting the Fed would argue that the strong dollar at this point is not in the U.S.’s interest.”

5. What’s next?

While it’s hard to pinpoint what a Trump presidency would mean for policy, he has pointed to drawbacks of a rising greenback. “I love the concept of a strong dollar, and in many respects obviously I like a strong dollar,” he told CNBC in May. “While there are certain benefits, it sounds better to have a strong dollar than in actuality it is.”

Clinton has steered clear from making explicit comments about the currency. Many say that under an administration led by her, the stance would remain largely as it is today. Any changes in the policy would be interesting -- after all, Rubin coined the strong-dollar mantra while her husband was president.

What’s clear to many analysts is that the existing administration’s view is either unclear or indifferent, and it may be time for something new. “If a policy has lost its relevance, it may well be time to change it,” said Ebrahim Rahbari, an economist at Citigroup Inc. in New York.

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