The Federal Reserve in Washington
The Federal Reserve in Washington. The Fed’s dovish pivot has sent volatility soaring across asset classes. Image Credit: Reuters

President Donald Trump has grown concerned that the strengthening US dollar is a threat to his economic agenda and has asked aides to cast about for ways to weaken the greenback, according to people familiar with the matter.

Trump asked about the dollar in job interviews with both Judy Shelton and Christopher Waller last week, whom he’s selected for seats on the Federal Reserve’s board, the people said. He lamented that the currency’s strength could blunt an economic boom that he expects to carry him to a second term.

The president’s top economic adviser, Larry Kudlow, and Treasury Secretary Steven Mnuchin both oppose any US intervention to weaken the dollar, the people said.

The president’s questioning of Waller and Shelton follows months of Trump hectoring the Fed to cut interest rates, a move that would have the effect of weakening the dollar. But beyond regular scolding of the central bank and its chairman, Jerome Powell, Trump hasn’t taken steps to reduce the greenback’s buying power.

Mnuchin hasn’t been directed to publicly talk down the dollar’s value, for example. And the Fed is now seen as less likely to cut rates after a surprisingly strong jobs report last week.

Waller, the executive vice president at the St Louis Federal Reserve bank, told Trump that central bankers don’t consider the value of the dollar when setting interest rates, the people said. Kudlow, who participated in the Oval Office meeting, reminded the president that the Treasury Department is responsible for monitoring the strength of the dollar.

‘Not employment’

But in an interview at a CNBC event in Washington on Tuesday, Kudlow said: “Price level stability and a steady dollar is what the Fed should aim for. Not employment.”

The Federal Reserve is mandated by Congress to seek maximum employment, stable prices and moderate long-term interest rates. The White House press office didn’t respond to a request for comment, and a Treasury spokesman declined to comment.

Trump’s focus on the dollar was heightened after the European Central Bank said June 18 it may lower rates for the euro region, prompting a fall in the currency’s value against the greenback. Trump has since complained that the Fed is putting US exporters at a competitive disadvantage by not also considering a rate decrease, and has said that the US would be better off with ECB President Mario Draghi in charge of its central bank instead of Powell.

A strong dollar gives American consumers more buying power for imports while raising prices for US exports, widening trade deficits that Trump has vowed to close.

The greenback has gained ground against currencies of many other major world economies in 2019. While the Bloomberg dollar index is roughly unchanged on the year, a Fed trade-weighted measure of the US currency is not far below the strongest since 2002, underscoring the headwinds American exports face overseas.

Dollar scapegoat

Trump appears poised to treat the strong dollar as a scapegoat should the economy falter before his re-election. In that, he is not alone on the campaign trail.

Democratic presidential candidate Elizabeth Warren last month called for “actively managing” the dollar to bolster US jobs and growth. Her proposal is akin to Trump’s rhetoric and would similarly break from a long-standing agreement among the world’s 20 major economies not to intervene in currency markets.

“If we were to aggressively knock the dollar down to improve trade, it would understandably lead to very, very strong reactions around the world,” said Fred Bergsten of the Peterson Institute for International Economics in Washington, who served as an assistant Treasury secretary in the Carter administration.

Trump has placed blame for the strong dollar squarely on Powell. White House officials say the dollar is too strong because the Fed has kept rates too high, which is why Trump expects the Fed — and not Mnuchin — to weaken the greenback.

The Treasury Department’s dollar policy has been relatively consistent over the past three presidential administrations: a strong dollar is in the nation’s best interest. That stance, first developed by former Treasury Secretary Robert Rubin, is underpinned by the view that a robust currency reflects a healthy economy and bolsters foreign demand for US debt.

Mnuchin caused jitters in financial markets in January 2018 by seeming to endorse a weaker dollar at the World Economic Forum in Davos, Switzerland.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” he said at a briefing. He spent the rest of the conference trying to clean up the remarks, insisting there had been no change in US policy.

Economic risks

Wall Street currency strategists have lately contemplated the notion that the administration could seek to weaken the dollar.

“Although it would be highly unusual for a US government to attempt further measures to weaken the dollar, it is not beyond the realms of possibility that the Trump administration will try,” Jane Foley, head of currency strategy for Rabobank, wrote in a July 5 note to clients.

Trump’s options to weaken the dollar are limited. He could seek an international pact with other large economies to jointly weaken the currency, but a senior White House official said there are no plans to pursue such an accord. Another option would be for Mnuchin to order the Fed to intervene, which would be executed by the New York Federal Reserve using money from Treasury’s exchange stabilisation fund and the Fed’s own dollar-denominated assets.

Talking the dollar lower introduces economic risks largely out of Mnuchin’s control. The US doesn’t have the kind of vast foreign-exchange reserves that trade rivals such as China and Japan maintain. The US Treasury has intervened three times in currency markets, according to the New York Fed. The last time was in 2011, when then-Secretary Timothy Geithner acted in concert with the G-7 to sell the yen after it surged following an earthquake and tsunami that caused meltdowns at Japan’s Fukushima Daiichi nuclear plant.

If the currency were to depreciate in a restrained way, the modest inflationary effects could boost prices of imports, aiding the Fed as it tries to raise inflation closer to its 2 per cent annual target.

However, if the fall in the greenback’s value became disorderly, intensifying inflationary pressures might force the central bank to raise rates faster than either Powell or Trump would like. Should long-term bond yields rise as well, the economy could potentially slow, raising costs to finance the nation’s ballooning budget deficits.