Trump reportedly has had predawn questions about the U.S. currency.
By Greg Robb
February 9, 2017
The phone rings at 3 a.m., and President Donald Trump is on the line. He wants to know whether a strong or a weak dollar is good for the U.S. economy.
According to a report in the Huffington Post, this recently happened to national-security adviser Mike Flynn.
Since the Clinton administration, the mantra that a strong dollar is in the nation’s interest has been official policy. Comments from Trump, incoming Treasury Secretary Steve Mnuchin and Trump trade adviser Peter Navarro all suggest that a rethink of the policy is underway.
MarketWatch asked some currency experts what they would say if they were on the other end of a call from the president.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York: People have scoffed at the “strong dollar” policy, but it’s best to stick to this commitment. It has lasted from Clinton to Bush and Obama. The real meaning of it is we won’t use the dollar as a trade weapon, and we won’t seek to depreciate to reduce our debt burden. It came after Lloyd Bentsen and James Baker tried to use the dollar as a weapon — so, both parties. Remember, what we do will become the lead for other countries. The worst thing for working-class Americans would be if our trade and dollar policies lead to a breakdown in the world economy. We’ll get inflation without our salaries matching it.
Paul Ashworth, chief U.S. economist at Capital Economics in Toronto: It is a very good question. A few years ago, when unemployment was high and inflation uncomfortably low, I would have said a weaker dollar was needed to boost aggregate demand via stronger exports. With the economy now close to full employment, however, an equally valid case could be made that a stronger dollar, which would improve real living standards, is more desirable. A weaker dollar might do little to boost real exports and end up pushing domestic inflation higher. More than anything else, a relatively stable currency would probably be most helpful over the next couple of years.
Alan Tonelson, founder of RealtyChek, a public-policy blog: Thanks for your call, Mr. President. For several reasons, the dollar serves as the world’s leading currency. And as long as it keeps playing this role, underlying demand for the greenback is going to be strong. But the dollar can become too strong — enough to harm the American economy — and especially the manufacturing sector that you’ve rightly identified as its productive heart. Currency movements don’t exist in isolation. So the more you focus on the crucial global and domestic policy landscapes, the less attention you’ll have to pay to the intrinsically risky task of seeking the dollar’s “correct” value.
Your critics have a point in warning that the kinds of international trade restrictions you seem to have in mind could drive the dollar high enough to price many U.S.-made goods out of markets all around the world. However, much of your emerging economic program can counteract these effects substantially, and bolster the American economy on net. On the trade front, for instance, Nafta could be turned into more of a trade bloc. Strict domestic-content standards for all inbound foreign manufacturing investment would also curb net imports, and spur more domestic production. Using U.S. trade laws more extensively can keep out of American markets goods that benefit from predatory foreign practices, especially China’s, through punitive tariffs — which can be sky high. And don’t forget the border-adjustment tax, some version of which deserves your strong support.
Stephen Roach, senior fellow at Yale University’s Jackson Institute of Global Affairs: I would say it’s really important at this juncture to reaffirm our conviction that a strong dollar has long been in America’s best interest. It’s a policy that has worked since the early 1990s. It served the purpose of removing the fear of currency instability from decision-making. The dollar has gone up and down and it has not prevented normal market fluctuations. But if the president altered the rhetoric, he’d be lifting the anchor of currency stability. There is a lot of concern. It is disconcerting and it raises the possibility of retaliatory currency adjustments from other major nations, the so-called currency war. In conjunction with other rather hostile comments with respect to trading practices of Mexico, Japan, Germany, and by inference, Canada, if you inject currency instability into that equation, you run the risk of a major shock to currency markets and global financial markets.
Brad Setser, senior fellow at the Council on Foreign Relations: “Right now the dollar is too strong. Based on past experience, the current level of the dollar will lead the trade deficit to rise over time. A dollar that is so strong that it leads to large and persistent trade deficits is a problem for the economy’s long-term health. In the short-run though, the dollar fluctuates based on the relative performance of the United States’ economy and the economies of its trading partners, and in response to the monetary and fiscal policies adapted by U.S. and its trading partners. The best way to bring the dollar down to levels that are more sustainable over time is for other countries to adopt policies that do more to support their own demand. Stronger support for demand would mean that they would have less need for easy monetary policies, and their currencies would strengthen.”
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