- Treasury Secretary Mnuchin rattled global markets with comments suggesting the administration actively favours a weaker dollar, an unusually blunt statement for someone in his position.
- Mnuchin did caveat himself – including saying a day later that he’s not concerned with the short-term moves in the dollar – but some investors see the dollar talk, coupled with new tariffs on solar panels and washing machines, as the start of a more aggressive approach on trade.
- The dollar is weaker for the 2nd day in a row after Mnuchin’s comments.
- It’s “tough not to conclude that the US dollar is being seen as part of trade policy,” according to Deutsche Bank macro strategist Alan Ruskin.
Donald Trump ran for president with an explicit promise to make the American economy less open to global trade, but that harsh protectionist rhetoric hadn’t been met with any real action until this week.
The Trump administration has now slapped tariffs on imported solar panels and washing machines, and then trotted out top Cabinet officials at the Davos meeting of global elites in Switzerland to ramp up the “America First” talk.
Most prominently, unusually blunt comments about the benefits of a weak dollar from the Treasury Secretary, Steven Mnuchin, sent the greenback tumbling nearly a full percentage point against a basket of major currencies for the biggest one-day loss in ten months.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos.
Mnuchin did add that dollar’s short-term value is “not a concern of ours at all,” and that “longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency.”
But the first part certainly seemed to jive with the new protectionist measures taken by the administration, and it’s all investors seem to be focusing on at the moment. The dollar continues to drop a day later.
Adding to the mix, Commerce Secretary Wilbur Ross said at a press conference in Davos: “There have always been trade wars. The difference now is US troops are now coming to the ramparts.”
This is no coincidence
For Alan Ruskin, macro strategist at Deutsche Bank, it all seems more than coincidental.
“Mnuchin’s comments on the dollar and trade in the immediate wake of protectionist measures, made it tough not to conclude that the US dollar is being seen as part of trade policy,” Ruskin wrote in a research note.
Given the administration’s enthusiasm about a record-setting stock market, Ruskin said the Treasury’s continued approach on the currency will depend on the reaction of investors.
“If equities like a weak dollar then there is a good chance that the US administration will like a weak/weaker dollar too,” Ruskin said. “The most obvious factor that could put a brake on many policies, not just US official attitudes to the weaker dollar, is if policy actions start to undermine the US equity market.” Stocks, it should be noted, continue to climb to new highs.
Ruskin said the actions raise the risk of retaliation from other countries, particularly China, the world’s second-largest economy and a frequent target of Trump’s anti-trade talk.
“It is early days and so far China has greeted US actions on trade with barely a blink, but generally China has a policy approach of ‘proportionality’ or proportional retaliation,” Ruskin said.
The steep 30% tariffs on solar panels are not directly targeted at China but might as well be, since it is the principal exporter of the goods.
Retaliation could hurt the American economy both by making it harder for US businesses to access the giant Chinese market and by raising prices of imported Chinese goods on US consumers. The weaker dollar is certainly good for American exporters – making their products more competitive on the global scale – but anyone buying goods from abroad (including raw materials that go into American made products), is going to get hurt. On balance, there are more of these buyers than there are sellers who would gain – which is the thing Trump is seemingly trying to change.
And this may just be the start
“While the president’s heated campaign rhetoric on the issue of trade has thus far failed to result in any meaningful policy changes (with the exception of the US withdrawal from the Trans-Pacific Partnership), we expect President Trump to take more action on trade in the coming months,” wrote Libby Cantrill, fund manager at PIMCO, in a recent blog.
That’s because Trump can act unilaterally on trade in ways that he cannot do with other key issues like immigration and infrastructure spending, adds Cantrill – “and it plays well with his political base.”
She says such actions could include everything from tariffs on aluminium and steel, intellectual property rights and a possible withdrawal from the North America Free Trade Agreement, “especially if the sixth round of NAFTA negotiations later in January are not more constructive.”