Does the U.S. Government Want a Strong
or Weak Dollar?
by the Curmudgeon with Victor Sperandeo
U.S. Treasury Secretary
Steven Mnuchin moved markets this week with his comment that a weak dollar
benefits American trade. That remark helped
plunge the U.S. currency to a three-year low and touched off a flurry of
speculation about the Trump administration’s economic plans. It also sparked a rally in gold, silver and
commodities (which are priced in dollars).
“The dollar is one of the most
liquid markets,” Mr. Mnuchin said. “Where it is in the short term is not a
concern of ours at all. Obviously, a weaker dollar is good for us as it relates
to trade and opportunities. But again, longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the
fact that it is and will continue to be the primary currency, in terms of the
“I thought my comment on the
dollar was actually quite clear yesterday,” he told reporters hours before Mr.
Trump arrived in Davos for the World Economic Forum. “I thought it was actually
balanced and consistent with what I’ve said before, which is we’re not
concerned with where the dollar is in the short term, it’s a very, very liquid
market, and we believe in free currencies. And that there’s both advantages and
disadvantages of where the dollar is in the short term. Let me say, I thought
that was clear.”
Mnuchin said on Friday he was
not trying to talk down the dollar and his comments earlier this week were
taken out of context, according to an interview with CNBC.
"I made the comment two
days ago in a press gaggle in the morning. What I said was actually
very even-handed and consistent with what I said before," Mnuchin
told CNBC from Davos, Switzerland. "I was not trying to move the
normally are highly disciplined when they speak on the dollar to ensure their
words are treated seriously when they want to signal policy shifts or to build
confidence in challenging economic moments,” said Gene Sperling, who served as
the top economic adviser to Presidents Barack Obama and Bill Clinton. “This
type of seemingly off-the-cuff and politically careless back and forth just
erodes that type of authority when it will be most needed,” he added.
James Paulsen of Leuthold Group Weighs-In:
our view, recent weakness in the U.S. dollar reflects growing inflation
expectations which should not be considered “good news” for the financial
markets. The accompanying chart overlays the U.S. dollar index (blue solid
line) with the embedded inflation expectation in the 10-year U.S. Treasury TIP
Bond Index. The bond market’s inflation expectation is shown on an inverted
right-side scale so that as the dotted brown line declines inflation worries
inflation destroys the relative value of the dollar. Clearly, throughout this
recovery, the U.S. dollar has been driven by inflation expectations. The dollar
did not surge in 2014 because the Fed or the bond market raised interest rates.
Rather, it increased in value because inflation expectations declined from
about 2.3% to about 1.2% enhancing the dollar’s real purchasing power. Since
last summer, inflation expectations have increased to a new three-year high
above 2.08% coinciding with the U.S. dollar recently breaking to a fresh
expect inflation evidence and inflation worries to keep climbing this year and
that implies further U.S. dollar weakness.
A U.S. dollar trending (collapsing?) lower is likely to bring much more pressure to a 10-year bond yield which is still below 2.7% and an S&P 500 P/E multiple based on trailing earnings per share of about 23x.
The Trump Administration
wants the U.S. dollar down. Let’s look
at what happened in the late 1970s to inflation and interest rates when the
From June 1976-77 through
1980, the U.S. dollar index declined -20.9% (DXY went from 107.05 to
· The CPI during that time period was + 9.60% compounded.
· Fed funds went from 5.25 to 14.00% and other interest rates also rose sharply.
In other words, inflation was
accelerating even while interest rates were rising during the dollar’s decline.
Normally, one would expect the dollar to increase in value on a strong rise in
rates. But that didn’t happen!
Also, U.S. GDP rose strongly,
but most of it was due to inflation. From 6/76 to 6/80, nominal GDP (unadjusted
for inflation) compounded at +10.8% annual rate. Yet “real GDP” only increased by +3.09%
This is the fundamental reason the dollar will decline: the Trump administration wants it down. The markets are predicting that inflation is finally going to spike upwards!
Good luck and till next time...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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