The Strong DollarBy
For decades, the U.S. stood out as the one nation that traditionally preferred its money superpower-strong. Investors flocked to it, enabling the U.S. to borrow lots of money at low interest rates. American consumers feasted on it, buying imported goodies for less. U.S. politicians touted it as evidence of the economy’s eternal dynamism. But under President Donald Trump’s “America First” manifesto, the so-called strong-dollar policy is undergoing a rethink. As other countries drove their currencies down, the strong dollar crimped U.S. exports and hurt American multinational companies’ earnings. It held U.S. inflation at levels considered too low. For the rest of the world, danger lurked in dollar-denominated debt sold in emerging markets like Brazil and India; the stronger dollar made those bonds harder to repay. With so many negative consequences, the question now is whether the strong-dollar dogma is becoming a relic, or is just in hiatus?
The dollar steadily declined against the world’s major currencies during Trump’s first year in office. In January 2018, it fell to its lowest level in three years. Steven Mnuchin, the U.S. Treasury secretary, openly acknowledged that a weaker dollar was good for U.S. trade. While saying he preferred a strong dollar over the long term, Mnuchin appeared to break with decades of strong-dollar allegiance, though a U.S. official denied that was his intent. The move toward higher interest rates in the U.S. and a surge in the interest paid on U.S. government debt have not made the dollar more attractive. Many other industrialized countries are seeing improvements in their economies and are able to compete against the U.S. for investors’ money. The currencies of emerging-market economies are also rising against the dollar, which helps them attract much-needed capital, reduces import prices and increases their consumers’ appetite for American goods. The less muscular greenback aligns with Trump’s protectionist policies: a desire for lower trade deficits, increased exports of American goods, renegotiated trade deals and higher tariffs on some imports. U.S. multinational companies had blamed the dollar’s strength for crimping profits in 2016; the weaker dollar is one reason many of them have since shown record profits.
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.
There are always winners and losers when a nation’s currency rises or falls. Yet Treasury secretaries since 1995 have pledged allegiance to the strong dollar, mostly to signify U.S. strength, even if they sometimes mused openly about the benefits of a weaker currency on jobs and economic growth. While U.S. officials often criticize other countries that manipulate their currencies, they aren’t blind to the benefits of a falling greenback. In 2016, the surging dollar weighed on the Fed’s plans to raise interest rates, with Chair Janet Yellen saying it had harmed U.S. exports. Former Treasury Secretary Lawrence Summers also warned in early 2017 that a stronger dollar would hurt American workers who are competing with Mexico. By backing away from the strong-dollar mantra, Trump may be signifying he’s willing to join ranks with other countries that have weakened their currencies to get a leg-up in world trade.
The Reference Shelf
- A Bloomberg markets column on the sudden death of the strong-dollar policy and another column (Bloomberg subscribers only) saying it ended years ago.
- Harvard University professor Jeffrey Frankel examines the Plaza Accord in a 2015 paper.
- A Bloomberg QuickTake explores the trajectory of currency moves and central bank policies.
- Intercontinental Exchange, owner of the New York Stock Exchange, 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.
First published March 17, 2015
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