US interest rates and the yen seemed to stabilize before US President Trump’s Wall Street Journal interview was released. For the first time in months, Trump used the bully pulpit to push the dollar down. The real broad trade-weighted dollar rose in seven of the last eight months in 2016, including the last four months of the year. It has fallen in the first three months of 2017. US exports are up 6.7% year-over-year in February. Exports trended lower in 2015 but recovered steadily last year and were at two-year highs in February.
Trump said the dollar was getting so strong that it was hampering the ability of US firms to compete. In an unusual act of contrition, the President said that the confidence the investors have in him was partly responsible for driving the dollar higher. For the record, the read broad trade-weighted measure of the dollar was lower at the end of March than it was at the end of November.
It is not clear what course of action the US will take, if any, to remedy the situation. Treasury Secretary Mnuchin likely was not a happy camper. Speaking for the US, Mnuchin agreed at the recent G20 meeting that countries ought not to seek economic advantage in the currency market. Trump stole much of the thunder of the upcoming Treasury report on the foreign exchange market by acknowledging what we have been arguing for some time: China is not manipulating its currency.
Some media coverage, without citing sources, said this reduced the threat that China would sell its Treasury holdings. We do not see the basis for the fear in the first place. Being cited a currency manipulator is more cosmetic than substantive, though because China had not been so deemed for more than two decades, it would be notable. At the first cut, being accused of manipulation requires bilateral talks, which, as we have noted, China and the US have already agreed to hold. If China sells Treasuries but maintains its reserve level, it is not clear what market is deep enough to absorb those flows, and at what cost to China ( loss of interest income, diversification, and liquidity)
While Mnuchin has stayed clear of trade issues, Commerce Secretary Ross did not return the favor. Foreign exchange policy is typically the purview of the Treasury Department. Yet, Ross suggested that the currency misalignments may be addressed in the comprehensive review of US trade that Commerce in the undertaking. Misalignments can happen without manipulation by officials and are often driven by differences in savings and investment, cyclical considerations, including relative interest rates, and investor asset preferences. It is essential that trade review draws on value-added trade data.
President Trump made two other revelations. First, he indicated that he wants health care reform before tax reform. He has gone back and forth in terms of priorities, but we have noted that the anticipated savings from health care reform were needed to fund tax reform. Second, he said that the reappointment of Yellen was a possibility. We discussed this a couple of days ago. It would be consistent with the recent tradition, but we suggested it is not very likely. On the campaign, Trump had accused her of not raising rates to help Clinton, but in the interview, he acknowledged he likes a low interest rate policy.
Here too the economic thinking is not particularly robust. Low interest rates are not a policy objective. At some parts of the cycle and under some conditions, low interest rates are not desirable. The proper monetary policy is one that is appropriate for economic conditions. Trump’s appointments to the Federal Reserve will be faced with the central bank’s mandated goals within reach. They too will favor a gradual increase in US rates.
The news broke late in the session, and the dollar was sold off as one would expect. It seems to be stabilizing a bit in early Asian turnover. The 10–year Treasury yield also stabilized at its lowest level since mid-November. In the short-run, the impact of the comments is palpable, but of the various factors that drive exchange rates, official druthers are not of material influence. They are literally noise about the fundamentally driven trend.