Breaking News
Investing Pro 0
Free Webinar - The Role of Psychology in Trading - Thursday, December 8, 2022 | 04:00PM EST Enroll Now

Column: Will Biden have a 'strong dollar' mantra?

Economy Nov 13, 2020 03:00AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: A U.S. dollar note is seen in front of a stock graph in this picture illustration
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own.)

By Mike Dolan

LONDON (Reuters) - U.S. President-elect Joe Biden has been warned not to tinker with the dollar's standing in world markets given the parlous state of the country's finances - but his new Treasury chief may be equally advised against talking up the currency too much.

In an open letter to the as-yet unknown next Treasury Secretary this week, Larry Summers - a former holder of the job and a Harvard professor - said the need for expansionary economic policies meant it would be "unwise to appear actively devaluationist or indifferent to the dollar."

"Favoring a strong dollar based on a strong economy or some such seems prudent," Summers wrote. "Within the councils of the Administration it is your vital role to emphasize that if the United States over-exploits the central role of the dollar in the international financial system to pursue parochial objectives, it puts that central role at risk."

The thrust of the letter, via Washington's Peterson Institute for International Economics, was that Biden's team should repair America's multilateral economic relations in forums such as the G20 and at the International Monetary Fund after four years of protectionism and either unilateral or bilateral actions.

As ambitious domestic tax changes would be difficult with a gridlocked Congress, and with financial stability already covered by the Federal Reserve, Summers insisted Treasury's energy should be directed towards urging the rest of the world to lift demand. He advocated a new policy mix of investment spending not undercut by bouts of demand-sapping austerity.

His caution about the dollar, however, was partly a sideswipe at four years in which President Donald Trump, even if not his Treasury head Steven Mnuchin, publicly complained about an overly strong dollar and often lambasted the Fed for not matching the easy-money policies of other central banks.

Perhaps unsurprisingly, Summers advocates an approach taken by himself and his predecessor Robert Rubin in the 1990s - one that answered every question about the exchange rate with anodyne mantras such as "a strong dollar is in America's interest".

"An oft-repeated phrase will promote more financial stability than any amount of thoughtful theorizing," he said in the letter.


But the timing of his concern about the dollar's valuable reserve currency status is well noted by markets who, on balance, remain bearish on the dollar due to bloated trade and budget deficits, mounting national debt and expectations of zero Fed interest rates and bond-buying for years to come.

Europe's largest asset manager Amundi, for example, said on Thursday the dollar was overvalued by about 5% against most major developed world currencies given the United States has lost its growth and real yield advantages against those countries.

And some feel this precarious position - exaggerated by the pandemic slump and massive government rescue - justifies more caution about dollar stability than has been shown for years.

"Larry Summers' comments, we believe, do serve to illustrate where the risks currently lie," said Derek Halpenny, head of global markets research at Japan's MUFG.

"The 'twin deficit' risk coupled with loose monetary policy will likely mean whoever becomes Biden's Treasury Secretary will be far more cautious on U.S. dollar rhetoric than President Trump has been during his term in office," said Halpenny, adding Treasury would do well to be cautious of central banks in China and elsewhere gradually diversifying dollar reserve holdings.

Goodbody's global strategic advisor, Joe Prendergast, points out that a "strong dollar" mantra could also be helpful to the Fed in keeping both policy and long-term interest rates down by subduing inflation expectations - especially as the central bank carries a bigger burden of economic support if a sizeable fiscal lift is gridlocked in Congress.

Graphic - Dollar's reserve:

Graphic - Dollar's twin problem:


But calibrating a stance toward the exchange rate can be tricky, and there are also risks to sustaining an overvalued dollar or giving the impression of a hard-currency zealot, who seeks persistently low inflation, tight money supply and a strong currency.

As played out again this year, the weight of dollar-denominated debts among global companies and emerging economies often leads to funding stress in a shock, or when the dollar rises. That dollar cash scramble often compounds the issue by lifting the exchange rate further.

And global stress exaggerated by a rising greenback - why the Bank for International Settlements dubbed the dollar "the new VIX" - could in itself cut across the sort of overseas growth that Summers insists the new Treasury Secretary needs to pursue.

If anything, the dollar tends to weaken when non-U.S. economies pick up steam, and that weakness loosens financial conditions around the globe.

Conversely a post-pandemic U.S. recovery before the rest of the world could balloon U.S. trade deficits - especially if a Fed rethink of zero rates sooner than others lifted the buck too. In that light, an explicit "strong dollar" policy may be unhelpful.

Perhaps the wisest approach would be to avoid any overt exchange-rate policy whatsoever - absent some new crisis.

For all Trump's fast-and-loose dollar talk, the currency actually remained fairly stable over the four years of his administration. After a period of initial weakness and then a rebound, the Fed's broad dollar index is within 1% of where it was when Trump won the election in 2016.

Keeping mum may be Summers' best advice.

"You will almost certainly find with respect to dollar talk, that less is more."

Graphic - Trump and the dollar:

(by Mike Dolan, Twitter: @reutersMikeD. Trump graphic by Saqib Iqbal Ahmed; Editing by Pravin Char)

Column: Will Biden have a 'strong dollar' mantra?

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
John Raymond
John Raymond Nov 13, 2020 3:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
strong usd mantra for biden if he is legally conirmed is impossible given his policies
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email