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Thursday, January 25, 2018

US Dollar Gets Slammed as Mnuchin Abandons Strong Dollar Mantra

US dollar gets slammed again as Treasury Secretary Mnuchin abandons 'strong dollar' mantra of predecessors

  • The dollar slides further after Treasury Secretary Steven Mnuchin said its fluctuation doesn't concern him.
  • The dollar is down more than 10 percent in the past year, and is off about 2 percent this week.
  • The dollar lost more ground against the euro after European Central Bank President Mario Draghi did not talk up his currency.
Patti Domm | @pattidomm

Dollar index hits 3-year low on Mnuchin comments 12 Hours Ago | 03:33

The greenback slid further Thursday after the Trump administration was seen as stepping back from the strong dollar policy that has been in place since the 1990s.

The dollar index was slightly lower, after falling sharply Wednesday on the initial comments from Treasury Secretary Steven Mnuchin that a weak dollar was good for U.S. trade. But when given the opportunity to clarify his comments at the World Economic Forum early Thursday, Mnuchin did not latch on to the strong U.S. dollar rhetoric used by past Treasury secretaries.

He said during a CNBC-moderated panel that the dollar can fluctuateand he is not concerned by the current weakness, but "in the longer term" believes in the "strength of the dollar."

Some strategists said Mnuchin may still support a strong dollar but his communication could be interpreted otherwise.

"Whatever the intent was, the fact they did it right after these trade actions on washing machines and solar panels suggest it's something more thought out. You saw Mnuchin was trying to walk it back, and [Commerce Secretary Wilbur] Ross tried to walk it back," said Win Thin, senior currency strategist at Brown Brothers Harriman. "The dollar was being sold even before these comments. There's other stuff going on. Our view is the rest of the world is getting better quickly, so the U.S. does not stand out so much."

But Mnuchin also failed to mimic the mantra used repeatedly by other Treasury secretaries, starting with Robert Rubin in the Clinton administration, specifically that a strong dollar is in the best interests of the United States.

"Best would have been if he used that phrase," said Thin.

For instance, Obama Treasury Secretary Jack Lew had said the strong dollar was good for America.

Mnuchin described his comments as "balanced and consistent" with his past comments. He elaborated that there were advantages and disadvantages of where the dollar is in the short term, and that the U.S. wants free and fair trade. "So I think it's clear. We're not looking to get into trade wars. On the other hand we are looking to defend America's interests," he said.

Throughout history, a country welcoming a weaker currency has been seen as using fighting words in the world trade arena, and Mnuchin's weak dollar comments complement the "America first" trade policies of the Trump administration. Trump, himself, helped break a higher dollar trend just before his inauguration when he said he preferred a weaker dollar. The dollar has lost more than 10 percent since then.

David Woo, head of global rates and foreign exchange at Bank of America, did not see Mnuchin's comments as signaling a shift in policy. "Rather, we see the statement in its entirety as reaffirming existing policy on the dollar as a reflection of US economic fundamentals, while acknowledging a more competitive USD valuation versus this time last year," he said in a note.

This week, the U.S. took aim at Chinese and South Korean manufacturers of solar panels and washing machines with a barrage of new tariffs. It is also renegotiating its sweeping 24-year-old NAFTA trade pact with Mexico and Canada. So far, the U.S. has held off from broader battles, but the skirmishes are getting global attention.

"I think he dug it in," said Robert Sinche, chief global strategist at Amherst Pierpont. "When you look at it from their perspective this is probably a good outcome. The dollar's weaker, we can get some manufacturing jobs and the stock market's higher, which the president uses as a major guidepost of what he's doing. What could stop all this? It seems the major thing that could stop this is the bond market. We're back to bond vigilantes, and it's not about interest rates, it's about debasing the currency."

Mnuchin's comments were made at the WEF conference in Davos, Switzerland, an annual event where world leaders from governments and businesses discuss topics related to globalization and trade. President Donald Trump is attending this year and speaks Friday.

"How Trump spins how 'what's good for America is good for the world' is going to be interesting," said Sinche.

Also Thursday, European Central Bank President Mario Draghi did not make any attempt to talk down the euro when he spoke following the ECB's interest-rate meeting. Draghi reiterated that the ECB monitors activity in the euro and its impact on prices. The currency was up more than half a percent and is up 2 percent against the dollar this week alone.

"He's not putting up a fight, not at all ... he's a smart guy," said Thin. "He realizes there's not much he can do. He just can't stand in the way of this and try and stop it. This is more a weak dollar story."

The euro broke higher to 1.25 to the dollar.

Draghi did say the euro's rise was partly the result of comments that contradicted an agreement not to talk currencies up or down.

"I honestly think Draghi thinks he took a very hawkish position," said Sinche. "He mentioned that in terms of the risks to the outlook, the risks are global and particularly from the exchange rate. I think his perspective is he was giving a strong signal and in fact, the dollar went the opposite way."

Mark McCormick, head of North American foreign exchange strategy at TD Securities, said he does not see a currency war coming between the major developed countries, but he does see the weak dollar causing pain for the dollar bloc, which includes the Canadian, Australian and New Zealand currencies.

Woo, unlike some other strategists, expects the dollar to rebound. He said the repatriation of U.S. corporate cash should add $300 billion of inflows into the dollar this quarter, as companies move money out of local currencies. He also expects Congress and the Trump administration to come to an agreement on spending issues, including infrastructure, and a resolution on some immigration issues, like the "dreamers."

Woo and McCormick also said the flow into equities is driving the dollar lower, as more money goes into international equities in Europe and Japan, and those funds are currently not being hedged.

Thin said the next big round level on the euro could be $1.40. "On the technicals, $1.26 is the 62 percent retracement of the 2014 high in euro," he said.

Source: CNBC


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