Janet Yellen once touted the benefits of a weaker greenback for exports, but as the incoming Treasury secretary, she faces pressure to return the U.S. to a “strong-dollar” policy — and may cause trembles on Wall Street if she doesn’t.
The greenback’s tumble this year — it’s heading for the second-biggest drop in the past decade — has already stoked foreign policy makers’ concerns, thanks to the competitive advantage it gives the U.S. Even a tacit endorsement of a weakening dollar could spur tensions with trading partners.
Yellen, President-elect Joe Biden’s pick for Treasury chief, if confirmed will take office about a month after her predecessor labeled two countries as currency manipulators and named 10 on a watch list for artificial interference. The moves, unveiled Dec. 16, capped a volatile period for currency commentary under President Donald Trump’s administration that heightens focus on Yellen’s approach.
The U.S. adopted a policy of favoring a “strong” dollar in 1995, marking an end to regular calls for other countries to drive their currencies higher. While the mantra did evolve from one Treasury chief to another, no administration from then until the Trump years communicated, as the president did in 2017, that the dollar was “getting too strong.”
While they sometimes did endorse a strong dollar — always from a long-term perspective — Trump and outgoing Treasury Secretary Steven Mnuchin said that a weaker currency would help American exports. Mnuchin also said an “excessively strong dollar” could have negative short-term effects on the U.S. economy.
It’s a sentiment Yellen herself has suggested she shared in the past.
As president of the Federal Reserve Bank of San Francisco in 2004, Yellen helped establish a view among investors that the U.S. central bank saw a weaker currency as a help in addressing the country’s current-account deficit. As the Fed’s chair a decade later, she continued to make that connection, saying repeatedly that dollar appreciation posed a drag for American exports.
A Biden transition spokesperson declined to comment on Yellen and dollar policy.
It’s the Treasury secretary’s job to oversee currency policy, and at least two former holders of that title have urged Yellen to make clear she doesn’t favor dollar depreciation. That’s after Mnuchin went so far as to entertain Trump’s consideration to forcibly weaken the dollar in mid-2019.
“It would be unwise to appear actively devaluationist or indifferent to the dollar,” Larry Summers, who was Treasury secretary under Bill Clinton and national economic adviser under Barack Obama, said last month.
Summers highlighted that the dollar’s dominant role in the global financial system puts the onus on the Treasury to manage its responsibilities carefully. Favoring a strong dollar is “prudent” for the incoming secretary, in particular given Biden’s plans for “expansionary policy,” said Summers, who is a paid contributor to Bloomberg.
Hank Paulson, who served as Treasury secretary under George W. Bush, made the same point in a Wall Street Journal opinion column this month.
“Interest rates are at historic lows, and the federal debt is larger as a share of the economy than at any time since the end of World War II,” Paulson wrote. “It is critically important to bend down the steep trajectory of the rising national debt. Otherwise, the dollar will eventually be debased. Washington won’t be able to pay its bills.”
Those aren’t the kinds of concerns Yellen needed to focus on during her tenure at the Fed, which began in the 1990s as a board member. She instead looked at how the exchange rate factored into the economic outlook, and what the implications were for setting monetary policy. The following comments illustrate a consistent take over time:
- “We have a huge current account deficit, and that is a drain on demand in our economy. A lower dollar ultimately should feed through into more demand,” Yellen said in September 2004.
- The drop in the dollar from 2002 “will help to improve our gaping trade deficit and thereby offset some of the otherwise contractionary effects of the tighter credit conditions,” Yellen said in December 2007.
- “The dollar has strengthened quite a lot over the last year and a half,” Yellen told lawmakers in December 2015. “The strength of the dollar is one factor that puts — means that monetary policy for the U.S. is more likely to follow a gradual path.”
- “A stronger dollar does have a depressing effect. It creates channels through which domestic demand is depressed. At the moment, net exports — well, for quite some time and probably going forward, they will be somewhat of a drag on U.S. growth,” Yellen said in June 2016.
“Yellen as a Fed person can talk about the benefits of a weaker dollar with regard to inflation and exports,” said Brad Bechtel, global head of foreign exchange at Jefferies LLC. “But as a Treasury secretary the typical stance is a strong dollar policy.”
The dollar’s exchange rate has been set by the market since the 1970s, and official comments don’t tend to have more than a fleeting impact on the greenback, but they are still viewed closely by overseas policy makers, along with investors — who currently anticipate the U.S. currency will drop further in 2021. The Bloomberg Dollar Index is down 4.3% for 2020.
The new administration’s pronouncements will be keenly eyed after the Mnuchin Treasury’s latest report on overseas foreign-exchange practices. For a quarter century, the U.S. held off on declaring any trading partner as a manipulator of its currency.
Mnuchin applied that label three times — for China from August 2019 to January, and, in Wednesday’s announcement, for Switzerland and Vietnam.
Switzerland’s central bank quickly rebuffed Mnuchin’s demand for it to scale back intervention in the franc. Taiwan, which is on the so-called monitoring list, said the Treasury inaccurately represented its foreign-exchange purchases.
On that score, Yellen has previously indicated a more understanding view of exchange-rate movements. In 2019, she said, “It’s really difficult and treacherous to define when a country is gaming its currency to gain trade advantages.”
“She will likely advocate a high hurdle both to express and implement an active dollar policy and also to be cautious in accusing trade partners of currency manipulation,” Daniel Hui, a JPMorgan Chase & Co. global foreign-exchange strategist, wrote in a Dec. 14 report.
Regardless of whether she actively returns the U.S. to a strong dollar policy or tries to shy away from any comments, Yellen is seen bringing stability and predictability to any comments on the $6.6 trillion-a-day currency market. She underscored the importance of message discipline when, as Fed chair, she called on her colleagues in 2014 to be mindful of what they said about the dollar and highlighted that it’s the Treasury that speaks for the U.S. government on the currency.
“By longstanding agreement, the Treasury speaks for the U.S. government on international economic policy and the dollar,” Yellen observed in the late-October 2014 Fed policy meeting.
More than six years later, that’s just the role she’ll be expected to take on.
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