Will Biden have a powerful greenback mantra ?: Mike Dolan

© Reuters. FILE PHOTO: A US dollar note is shown in front of a stock graph in this illustration

(The author is the editor-in-chief for Finance and Markets at Reuters News. All views expressed here are his own.)

By Mike Dolan

LONDON (Reuters) – US President-elect Joe Biden has been warned not to tinker with the dollar’s position in world markets in view of the country’s poor financial position. However, his new CFO can also be advised against over-pronouncing the currency.

In an open letter to the undisclosed Treasury Secretary this week, Larry Summers – a former tenant and a Harvard professor – said the need for expansionary economic policies meant “it would be unwise to be actively pejorative or indifferent.” the dollar. “

“The preference for a strong dollar on the basis of a strong economy or one seems reasonable,” wrote Summers. “In the councils of government it is your crucial task to stress that the United States is jeopardizing this central role if it overuses the central role of the dollar in the international financial system to exploit the parochial goals.”

It was suggested through the Peterson Institute for International Economics in Washington that Biden’s team, after four years of protectionism and either unilateral or bilateral action, should repair America’s multilateral economic relations in forums like the G20 and the International Monetary Fund.

Because ambitious domestic tax changes would be difficult with a stalled Congress and financial stability already covered by the Federal Reserve, Summers insisted that the Treasury’s energy should be directed to pushing the rest of the world to raise demand. He advocated a new political mix of capital spending that was not undermined by demand-saving austerity measures.

His caution on the dollar, however, was partly a sideways swing after four years, during which President Donald Trump, even if not his CFO Steven Mnuchin, publicly complained about an overly strong dollar and often accused the Fed of failing to follow easy money policies meet other central banks.

Perhaps unsurprisingly, Summers endorsed an approach he and his predecessor Robert Rubin took in the 1990s – one that answered every exchange rate question with anodyne mantras like “A strong dollar is in America’s best interests”.

“A phrase that is repeated many times will promote more financial stability than any amount of thoughtful theories,” he said in the letter.


However, the timing of his concern about the status of the dollar’s precious reserve currency is well noted by the markets, which overall remain bearish against the dollar for the coming days due to inflated trade and budget deficits, rising national debt, and expectations of zero Fed interest rates and bond purchases Years.

For example, Europe’s largest wealth manager Amundi said Thursday the dollar was about 5% overvalued against most major developed market currencies as the United States lost its growth and real return advantages over those countries.

And some believe that this precarious position – exaggerated by the pandemic slump and massive government bailout – warrants more caution about dollar stability than has shown for years.

“We believe Larry Summers’ comments are intended to illustrate where the risks currently lie,” said Derek Halpenny, head of global market research at Japan’s MUFG.

“The risk of a ‘double deficit’ coupled with loose monetary policy will likely mean that anyone who becomes Biden’s Treasury Secretary is far more cautious about US dollar rhetoric than President Trump was in office,” Halpenny said, adding added that the Treasury Department would do well to be wary of the central banks in China and elsewhere as they are gradually diversifying dollar reserves.

Goodbody’s global strategic advisor Joe Prendergast suggests that a “strong dollar” mantra could also help the Fed in keeping both policy and long-term interest rates down by dampening inflation expectations – especially as the central bank bears a greater burden of economic support when a sizeable fiscal recovery is stalled in Congress.

Graphic – dollar reserve: https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjekemvr/Reserve.PNG

Graphic – Dollars double problem: https://fingfx.thomsonreuters.com/gfx/mkt/qzjpqojozpx/TWIN.PNG

Do not exaggerate

However, it can be difficult to calibrate an attitude towards the exchange rate, and there is also the risk of sustaining an overvalued dollar or creating the impression of a hard currency eagerness to seek persistently low inflation, tight money, and a strong currency .

As shown again this year, the weight of US dollar-denominated debt in global corporations and emerging markets often results in funding stress in shock or when the dollar is rising. This dollar-cash scramble often exacerbates the problem by further increasing the exchange rate.

And the global stress exaggerated by a rising greenback – why the Bank of International Settlements called the dollar “the new one” – could in itself hurt the overseas growth that Summers insists the new Treasury Secretary must act on.

If anything, the dollar tends to weaken as economies outside the US gain momentum, and that weakness eases financial conditions around the globe.

Conversely, a post-pandemic rebound in the US ahead of the rest of the world could drive US trade deficits higher – especially if a Fed rethinking zero rates raised money earlier than others. Against this background, an explicit “strong dollar” policy cannot help.

Perhaps the smartest approach would be to avoid an open exchange rate policy – without a new crisis.

Despite all of Trump’s quick and easy dollar talks, the currency actually remained fairly stable over the four years of his tenure. After a period of initial weakness and a subsequent rebound, the Fed is within 1% of what it was when Trump won the election in 2016.

Holding mother can be Summer’s best advice.

“You will almost certainly find, on dollar talks, that less is more.”

Graphic – Trump and the Dollar: https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkjbrovm/Pasted%20image%201604330028526.png

(by Mike Dolan, Twitter: @reutersMikeD. Trump graphic by Saqib Iqbal Ahmed; Editing by Pravin Char)

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