The Strong Dollar
The almighty dollar is mightier than ever. As the U.S. economy chugs along and most others struggle, investors are flocking to it, enabling the U.S. to borrow lots of money at low interest rates. American consumers can feast on it, buying imported goodies for less. U.S. politicians tout it as evidence of the economy’s eternal dynamism. Other countries are driving their currencies down, making their goods more competitive on the world market. Not the U.S. It stands out as the one nation that has traditionally preferred its money superpower-strong. That’s a mixed blessing. The high dollar hurts some American multinational companies’ earnings by reducing the value of sales abroad. It has held down U.S. inflation to levels considered too low. For the rest of the world, danger lurks in surging dollar-denominated debt sold in emerging markets like Brazil and India; the stronger dollar makes those bonds harder to repay. Now the policy may be ready for a re-think under President Donald Trump.
In an interview with the Wall Street Journal days before he took office, Trump called the currency "too strong," signaling he may break with decades of allegiance to what's known as the strong dollar policy. During his confirmation hearing to be Treasury secretary, Steven Mnuchin told lawmakers the long-term strength of the U.S. dollar is important and said Trump’s comments weren’t meant as a longer-run policy. The U.S. Dollar Index, which tracks the greenback against six major currencies, surged 28 percent from the start of 2014 to the end of 2016, including a 4 percent bump after Trump's victory in November. The move toward higher interest rates in the U.S. — while they remain near zero or even negative in the rest of the world — has made the dollar more attractive, pushing its value up. Big-name American companies, including Apple, Mattel and Gap, blamed the dollar’s strength for crimping profits in 2016. A stronger dollar has meant a weaker yen, hurting U.S. automakers by helping Japanese competitors like Toyota, which make more money on each car sold in dollars. A slumping euro means good things for companies in Europe that sell in the U.S. Yet for emerging-market economies, a rout in their currencies has lured capital away and limited growth. There’s also been a slowdown in the housing market in places like Miami, which has become more expensive for foreigners.
The U.S. economy became the world’s largest in the 1870s, yet the British pound remained the dominant currency. That changed starting with the creation of the Federal Reserve in 1913. World War I helped too by forcing other nations to suspend convertibility of their money to gold. The Bretton Woods agreement made the dollar’s preeminence official in 1945 as U.S. money became the standard used to fix exchange rates. That system collapsed in 1971, but the dollar's ascendancy continued. In 1985, the Plaza Accord reached by the U.S. and the other four richest economies pushed down the dollar’s value for a while to slow Japanese exports. It didn’t last. The dollar remains the dominant reserve currency, used by countries to pay international debts. In 1995, Treasury Secretary Robert Rubin asserted that a strong dollar is in the U.S. national interest, a mantra repeated by each of his successors (though not always with conviction). Even the global financial crisis of 2008 strengthened the dollar, as investors sought safety in U.S. government debt.
The Treasury Department under President Barack Obama was unwavering in its allegiance to the strong dollar. Now the policy is looking more like a relic: The rising greenback has made it tougher for the Federal Reserve to raise interest rates, with Chair Janet Yellen saying in June that the surging dollar has harmed U.S. exports. Trump has said a strong dollar sounds better than it is in reality; his Treasury secretary, Mnuchin, has instead stressed the priorities of growth and jobs. Former Treasury Secretary and Obama adviser Lawrence Summers warned in early 2017 that a stronger dollar would hurt American workers who are competing with Mexico, running against Trump's goals. So Americans should hold off on the champagne, even if the strong dollar makes it a bargain.
The Reference Shelf
- A Q&A on why the strong dollar policy may be a relic of a long-gone era and an article on its possible fate under President Trump.
- Harvard University professor Jeffrey Frankel argued in a 2015 paper that the dollar hasn’t strengthened enough to warrant a modern-day Plaza Accord.
- A Bloomberg article about the strong dollar and the 2016 presidential race, and an analysis of the hurdles to a new Plaza Accord.
- A March 2015 report by Bloomberg Briefs and a Bloomberg QuickTake explore the trajectory of currency moves and central bank policies.
- InterContinental Exchange, a network of market clearinghouses, explains the ins and outs of the U.S. Dollar Index.
- The Cornell University economist Eswar Prasad argues in a 2014 book “The Dollar Trap” that the dollar will remain the cornerstone of global finance.
- Bloomberg Media has a video explainer on the dollar’s rise.
First published March 17, 2015
To contact the editor responsible for this QuickTake:
Leah Harrison at email@example.com