At Davos, Mnuchin's 'weak dollar' talk sets nerves on edge

pulse

January 25, 2018 3:26 AM

US Treasury Secretary Steven Mnuchin on Wednesday broke with tradition by signaling he favored a "weaker dollar," in comments that drove the US currency sharply lower.

US Treasury Secretary

Mnuchin's remarks at the World Economic Forum in Davos, Switzerland, a bastion of trade liberalization, underscored concerns the US is taking a more adversarial approach towards trading partners as part of its nationalist economic agenda.

"Obviously a weaker dollar is good for us, it's good because it has to do with trade and opportunities," Mnuchin said.

He added, however, that "in the long term, the strength of the dollar is a reflection of the strength of the US economy and it continues to be the primary currency, in terms of the reserve currency."

The dollar already had weakened since Tuesday when US President Donald Trump signed fresh protectionist measures against China and South Korea, and the currency lost even more ground after Mnuchin spoke.

The dollar briefly hit its lowest level against the euro since December 2014 at $1.2356, before paring some of its losses later in the day.

Mnuchin's comments were widely interpreted as a possible green light from Washington to let the value of the dollar slide to make US exports cheaper, in another bid to taking aim at China and other trading partners.

That could be seen as a departure from the long-standing agreement among major economies to avoid weakening their currency to gain a competitive trade advantage.

The statement also deviated from a US tradition of Treasury secretaries publicly favoring a strong dollar.

"I'm not sure Mnuchin has much of a filter. He basically says what he wants to say and that's what he thinks," Joel Naroff of Naroff Economic Advisors told AFP. "I don't think they will be unhappy if the dollar falls."

Bold, yes. But smart?

Officials downplayed talk the administration was departing from US dollar policy. Appearing on CNBC from Davos, Commerce Secretary Wilbur Ross said Mnuchin "wasn't advocating anything."

And in Washington, White House Press Secretary Sarah Sanders seemed to tamp down any implication Washington might be attempting to jawbone the currency.

Asked if Trump would prefer a weaker or stronger dollar, she said, "We believe in free-flowing currency. The president has always believed in that."

She said the dollar remained the global reserve currency due to its stability and strength of the US economy.

"Currently we have a stable dollar because of how well the US is doing and it's as powerful as it has ever been," she said.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, told AFP he was pleased to see Mnuchin favoring a weaker dollar.

"A strong dollar has been very harmful and been going way too long," he said.

"I'm sure the Europeans are not thrilled but the fact is that they have already a big trade surplus, especially Germany."

But Gregory Daco, chief US economist at Oxford Economics, said openly favoring a weaker US currency could spur "a race to the bottom."

"Everybody wants to have a currency that's more competitive than the dollar or their trading partner," he told AFP.

"Yes, it is positive from an export perspective but there are negative aspects too that can't be overlooked," he added.

"It might be bold but it might not be the smartest move."

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