When Treasury Secretary, Steven Mnuchin argued at the Davos conference for a weaker U.S. dollar, he broke with a long line of Treasury secretaries who have historically favored a strong dollar. In the 1990s, Secretary of the Treasury, Robert Rubin was known for his firm stance that the dollar must be protected to safeguard the buying power of Americans. He argued that the strong dollar makes imported goods less expensive at home and puts pressure on American producers to become more competitive, two factors often cited in keeping inflation in check.
On the trade side, a strong dollar results in an improved U.S. terms of trade. An improved terms of trade means that for every unit of exports sold, more units of imports could be purchases to the benefit of the consumer and the nation as a whole. Given that the U.S. economy is intricately tied to suppliers worldwide, raising the cost of intermediate products only worsens its competitive position, precisely the opposite hoped by the Trump Administration—- a perfect example of the need to be aware of unintended consequences. Lastly, commodities are priced in U.S. dollars, meaning that a falling dollar adds further to the cost of living at home. A weak dollar does not serve the interest of the American consumer or the American producer.
Figure 1 The Tumbling US Dollar
On the capital account, a strong dollar means that the United States can maintain lower interest costs to attract capital inflows needed to offset a trade deficit. Lower interest costs, in turn, allows the Federal government to continue to finance its budget deficits. In the 1970s when the U.S. dollar was under great pressure, the Carter Administration was forced to issue debt denominated in Swiss francs and German marks in order to attract foreign buyers. The last thing this Administration would like to see is the U.S. Treasury issuing debt in foreign currencies to meet long-term funding requirements. Recent reports of China and Japan, who together hold 50% of U.S. government debt, hint at their central banks shifting into other currencies to avoid capital losses.
