Treasury Secretary Mnuchin did not cause the recent dollar dive. His remarks
(“Obviously a weaker dollar is good for us as it relates to trade and opportunities”) at
the World Economic Forum in Davos were surprising, because government officials have
historically not been willing to acknowledge that when the value of the dollar falls, it
makes US exports cheaper. The result can be good for US manufacturers and can also
improve the trade balance.
That said, coming a day after the administration announced new tariffs on washing
machines and solar panels (amid whispers of similar actions on aluminum and steel) and
ongoing vows to rewrite trade deals like NAFTA, Mnuchin’s words created worry among
currency traders, who are not exactly sure where these policies will lead.
The dollar fell more than 13 percent last year on a trade-weighted basis, despite three
Fed interest rate hikes in 2017—and it’s down 3.5 percent this year. Central bank
tightening combined with solid growth would usually strengthen the currency, but that’s
not what has occurred. There are various explanations proffered, the most prevalent of
which is that economies in Europe and Japan have improved more than expected,
prompting those central banks to shift from looser to tighter monetary policy and in
turn have made those currencies more desirable than the greenback.
In the end, there are many reasons that the dollar is weakening, but Mnuchin is correct
in that it does help boost US growth, especially in the short term. For all of 2017, GDP
accelerated at a 2.3 percent rate, up from the 1.5 percent in 2016, but pretty much in
line with what we have seen over the past eight years. Forecasts for 2018 range from
2.5 to 2.8 percent, due to an expected increase in corporate spending, resulting more
from the acceleration of growth than from the GOP tax plan.
World growth should also strengthen. The IMF upgraded its forecasts for this year and
next, banking on still low global interest rates and positive business conditions. What
might change the outlook is a trade or currency conflict, or all-out war. Meanwhile, the
stock market is scaling new heights and bond yields are rising. If you like a roller coaster,
buckle up and enjoy the quiet clicking as the aging bull market advances. If you don’t
like what could be the next portion of the ride - the big drop - be sure to rebalance and
withdraw any cash you might need over the next year.