- The Trump administration has a rather distant relationship with telling the truth.
- We now know, after some missteps at the World Economic Forum, that when it comes to the sliding US dollar, that lack of familiarity with the truth has consequences.
- It may mean the administration has limited control of the currency.
No one trusts the Trump administration to tell the truth, and that has become a serious problem.
It is not a problem because of anything having to do with North Korea, or Robert Mueller, or a deal to save the livelihoods of young immigrants protected from deportation under the Deferred Action for Childhood Arrivals program.
It is a problem because the US dollar is falling – and over the past few days, the Trump administration has proved that its words can do very little to stop its cascade.
It is a problem because, in the cloistral world of foreign exchange and currency, words actually mean things. Words from the right people can change the way money flows around the face of the planet. And now, in the United States, the right people simply cannot be believed.
One day in Davos
On Wednesday, Treasury Secretary Steve Mnuchin made a stupid mistake.
“Obviously, a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin said at a panel at the World Economic Forum in Davos, Switzerland.
What Mnuchin was signalling – and here on Wall Street, we live for signals, even the faintest ones – was an end to the US’s policy on the dollar going back to the Clinton administration, a titanic shift.
Then the dollar fell to a three-year low, after weeks of selling on fears that the administration would do nothing to stop it.
Michael van Dulken of Accendo Markets wrote in a note to clients that Mnuchin’s words had traders – naturally skittish creatures if there ever were some – worried about a return to currency wars.
On Thursday, and again on Friday, Mnuchin tried to backtrack. His boss, President Donald Trump, tried his hand at calm too.
“The dollar is going to get stronger and stronger, and ultimately, I want to see a strong dollar,” said Trump, whose support for a strong dollar has in the past not been so certain.
Trump’s assurances worked for a hot second, and then they did not.
The dollar is continuing its trend downward. You can see how this would be an unfortunate circumstance during the World Economic Forum. Trump was there to sell the idea that the US is open for business – meanwhile, the dollar was saying that anyone who buys America is buying a depreciating asset.
“‘Words’ in the world of FX do matter – the big turn in the dollar cycle in 1985 was driven by the Plaza accord, and in 1995 by Treasury Secretary Robert Rubin’s initiation of a strong dollar policy,” Deutsche Bank analysts wrote in a note on Friday morning.
“We would argue the medium-term bear market in the dollar started with the inauguration of President Trump and President Macron in the US and France, respectively, last year. It has coincided with a structural shift in the relative flow dynamics between the US and the rest of the world.”
It is here that we should note that money flows are currently headed to Europe (to Macron) and away from the US (Trump).
There are several reasons for this that have little to do with politics.
Wall Street analysts have for months been saying 2017 was a peak for the strong dollar cycle. They will give you a bunch of economic nerd reasons – Deutsche Bank said it was because “the sum of the current account, portfolio balance, and foreign direct investment flows peaked last year.” Another financier told me it was a function of central-bank and petrodollar rebalancing.
That may all be true, but I’ll give you another reason: No one trusts us anymore. No one believes a word these Trump people say, not even when they try to unsay it.
Markets run on trust, markets run on trust, markets run on trust, markets run on trust
Americans have gotten used to taking their president’s words with a grain of salt. Even during the campaign, Trump’s surrogates were saying he should be taken “seriously, not literally,” whatever that means.
That may work in the petty world of politics and popularity contests, but this is Wall Street, and this is where that nonsense stops. The world of markets runs on trust. The word “credit” – the power behind global financing – comes from the Latin word for trust.
As Treasury secretary, Mnuchin should have at least one power: to convey the economic thoughts of the Trump administration. But he can’t do that. He should be trusted when he tries to do so, but he isn’t. It’s unclear whether that’s a personal failing, a lack of talent for articulating his thoughts, or a direct response to the administration’s policy.
If it is the latter, there are two uncomfortable calculations Wall Street must consider. One is that the administration actually wants a weak dollar – something Mnuchin’s ineptitude laid bare for all to see.
The other is that the administration has no policy on the dollar. This would be the height of incompetence, and yet it would shock no one. In fact, it’s totally plausible.
Bankers and traders are, in some sense, the world’s plumbers. Their job is to watch and facilitate the flows of money where it is needed. They know where it’s flowing heavily, or has slowed to a trickle, or is blocked completely, stopped up by bad policy or overindebtedness or international politics. Most of them, contrary to Hollywood’s image of the thrill-seeking trader, are incredibly risk-averse.
Based on a reading of Wall Street research following Mnuchin’s mea culpa, none of these plumbers sees flows heading to the US and strengthening the dollar in the near future. This is a combination of the world of finance believing that conditions are correct for a dollar slide and that the Trump administration is unlikely to do anything to stop it, contradicting Mnuchin’s and the president’s statements.
Trust that this means they will for the most part move in concert on this information. This is a group of people who, aside from a few exceptions, literally all wear the same tie.
For them – and so for all of us – it is a disaster that the Trump administration cannot be counted on to clearly articulate its policy goals. It is a disaster that when it does, no one believes it.
The administration’s penchant for lies is messing with our money now. And that matters.
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