Mnuchin comment surprises markets, turns dollar decline into 'one-way bet'


By Patti Domm
CNBC, New York
Wednesday, January 24, 2018

Treasury Secretary Steven Mnuchin's comment that a weak dollar is good for the country accelerated a decline in the currency and fed fears in a market already speculating that White House may make the dollar less attractive for the longer term. ...

Mnuchin's comments echo statements by President Donald Trump, who famously helped turn a market trend of a stronger dollar last January when he said, prior to his inauguration, that the dollar was "too strong" and that U.S. companies can't compete because of it, particularly against the Chinese. The dollar index has lost more than 10 percent since then, and after Mnuchin's comment this morning, it sank to a new three-year low.

... Report continues below ...


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The comments also depart from the policy of the past three presidential administrations and Treasury secretaries, going back to Robert Rubin, to support a strong dollar policy, at least publicly. Prior to Trump, presidents in recent history have refrained from talking the currency up or down. ...

While the weak dollar could help U.S. exports, strategists point out it devalues all types of U.S. assets, including Treasurys, and makes the cost of goods from overseas more expensive for everyone from manufacturers to everyday Americans.

Whether a weak dollar policy was the intended message or not, the fact that Mnuchin made the comments at a briefing at the World Economic Forum's annual meeting in Davos, Switzerland, was not lost on the market. The forum is viewed as the bastion of globalization and free trade, while Trump officials have been or are expected to reaffirm the administration's America first policies, seen as protectionist by some.

"I think you could have a situation where cyclical forces come into play, and it snaps back, but for now, they've put a wild card on the dollar, which could tell you that normal cyclical forces won't operate," said Robert Sinche, chief global strategist at Amherst Pierpont. "They basically open this up as a one-way bet for traders, and traders will keep pushing it and keep pushing it. ... Who's going to stand in front of it? It's not a healthy global environment."

The Trump administration, which this week slapped new tariffs on Asian washing machines and solar panels, sees a weaker dollar as a positive for American exporters. But on the other hand, the market has been worrying about the fact that central banks are clearly diversifying reserve holdings away from the dollar, and U.S. assets, like Treasurys, could become less appealing.

"I think the dollar will stay the reserve currency -- We're too big and too influential -- but does it mean people have to hold so many dollar assets if the administration says this is not a good place to hold your money, particularly with a trillion-dollar deficit? There's a long way down," Sinche said. ...

... For the remainder of the report:

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