Weakening the Dollar ?????

[frayne]

Just reading an article about the consideration of weakening the US dollar. Showing my ignorance here but why would that even be a consideration and wouldn't that be paramount to currency manipulation, something we don't like others to do ? Not to mention the deleterious impact on American consumers. Can someone help me out here ?

 

[NYEXPAT]

Nobody needs to do anything. Sentiment will continue to take it up to 99.59 whereby it will drop down to the 93 level before ultimately taking out the Jan 2018 lows.

 

[MichaelB]

How does a change in currency affect the US? The immediate (first order) impact is to our balance sheet:

Our liabilities in foreign currency become more expensive.
Our assets in foreign currency become more valuable.
In aggregate we have more foreign assets than foreign liabilities, so devaluation increases our relative wealth.
US$ based liabilities and assets held by or in foreign countries are not affected.

The ongoing (second order) impact is to the current account and domestic economy:

The immediate impact is like a tax on imported goods. The cost of domestic labor becomes less expensive compared with other countries. The cost of goods and services produced in the US declines relative to the rest of the world. In theory, imports would become more expensive and US goods less expensive to export markets, and so they would shift. This would result in less production available for domestic consumption. so real consumption per unit of labor would decline. GDP increases but domestic sales and profits decline.

This might lead to an increase in new domestic investment. (Might, because other factors influence investment decisions).

The St Louis Fed (FRED) is a treasure chest of data. Here’s one graph showing the value of the US$ (real) relative to our trading partners for the past 45 years. https://fred.stlouisfed.org/series/TWEXBPA


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[MichaelB]

Not to mention the deleterious impact on American consumers.

If you look at the St Louis Fed graph in the previous post, you can see two periods, one in 1985 and the other in 2002, where there was significant and extended decline in the value of the US$, yet we really cannot claim there was serious negative impact on US consumers. In fact, it's not easy to see the impact of such devaluation in our economic data. Because we were the single largest consumer market in the world, loss of value in the US$ can't be easily offset by price increases for services and manufactured goods - sellers would lose their markets.

 

[frayne]

Thanks MichaelB for the education. One more question, what are the actual mechanics of devaluing the dollar ? Just lowering interest rates ? Changing exchange rates ? I'm clueless here.

 

[MichaelB]

Thanks MichaelB for the education. One more question, what are the actual mechanics of devaluing the dollar ? Just lowering interest rates ?

That’s a very smart question, and equally difficult to answer. Because the US$ is the global reserve currency, it acts differently from other currencies.

To lower the value of the US$ with respect to our trading partners and keep it there would probably take the concerted action of all the major central banks acting together, or it would require the US Treasury and the US Fed to act together.

The Central Banks would need to agree on a value, then all sell dollars until the US$ reached that level. This is not a likely scenario, but it has happened in the past.

The Treasure and the Fed, working together, have lots of options, but it’s very challenging without the Fed. Buying endless amounts of bonds to push down rates is one. Placing limits on capital movements is another. Restrictions on the use of dollars for non US transactions would certainly do it. Anything that restricts the free flow of US currency or liquidity would impact the value of the US$. The problem is, that is against the mandate of the Fed, and would have deleterious effect on the Fed’s ability to carry out its primary mandate, which is US monetary policy. It would certainly compromise the independence of the US Central Bank.

One tenet of economic theory is you cannot manage an exchange rate, have an independent monetary policy, and allow the free flow of capital. Any two of those conditions preclude the third. This is one of the reasons the US$ is the reserve currency - no other country is willing (or able) to do that.

 

[MichaelB]

As a casual but interested observer, it seems to me that the major Central Bankers all have their own idea of what constitutes an acceptable range of value for the major currencies. When a currency starts to slip outside that range, they start making speeches with discreet references about value, and soon enough, the offending currencies adjust. Politicians of those same countries also comment and say things, but their voices have little impact on real monetary policy. Central Bankers of all the major economies are committed to showing and keeping the appearance of independence.

 

[marko]

Seems over the past few weeks we've had an uptick on concerns about the US debt, dollar value and worries about some nebulous upcoming US financial crisis. Seems to be a lot of doom and gloom with people saying they're glad they're old and will be dead in due time; not very optimistic.

A bit of a drift away from our usual discussions here about when to take SS, RMDs or pay off the mortgage in a time when the economy is sound, unemployment is historically low and most of our portfolios are having record years.

Strikes me a bit odd. Not a critique, just an observation. Not everything is sunshine and rainbows, but I am struck by a certain tone of financial pessimism when, at least from my perspective the financial end of our country is doing well.

FWIW.

 

[RobLJ]

This came up in the Dalio article, but it is clear that the present administration's policy is to weaken the dollar (I'm a little amused that Trump and the GOP were mumble-mumbling about the prior administration's "weak dollar" policy and the Fed was way too accommodating, but that can be dismissed as normal political posturing, I suppose. It's a waste of time to look for foolish consistency on both political sides on such matters as relative currency levels, like the deficit.)

The interesting argument (to me, at least) is that China and other nations have weakened their currencies, so we have to do so as well.
One of the alternate points is that we have benefited for several generations by oil being priced in dollars, and the dollar as the basis for exchange rates, but I suppose no-one thinks this is worthy of consideration (although it allows us to print currency to wash out the increasing debt load of the recent Tax Bill and boomers like myself getting ready to cash in our SS checks.)

Relative currency is a fun game of blame, but clearly by jaw-boning the Fed on rates we are trying to depreciate the currency. The "Strong dollar" is so 90's! (I'm teasing; as the above indicates you can make a good case for a weaker dollar, ..........until we lose world currency status; then it might not be quite so "cool." )

Just reading an article about the consideration of weakening the US dollar. Showing my ignorance here but why would that even be a consideration and wouldn't that be paramount to currency manipulation, something we don't like others to do ? Not to mention the deleterious impact on American consumers. Can someone help me out here ?

 

[RobLJ]

Sorry about being overlong. Being the cleanest shirt in a plumber's closet comes to mind about the US dollar. What the current administration is doing is essentially jawboning, which I doubt will be very effective. Goosing the deficits long term with the Tax Law I suspect will be more effective in lowering the exchange rate, maybe.

I did enjoy spending 3 weeks in Ireland at the current exchange rate in late June and July (but that's not very relevant.)
(Further edit: Michael's point above about global exchange rates is essentially the other point I neglected to add, but it is directly on target. I was being lazy and didn't read the whole thread.)