The comment sent the dollar tumbling to a 3-year low, although much of the drop was reversed when President Trump made positive comments about the dollar a couple of days later.
Mnuchin took a lot of flak for his words, but what he said was absolutely true. It's just that traditionally, U.S. Treasury Secretaries have not said those words aloud. There has been a long-standing tradition in the Treasury department to avoid any language about a weakening dollar.
It's unclear to us whether the remark was a mistake or part of the administration's broader “America First” agenda.
In previous administrations, officials making public comments chose their words carefully with an eye toward any impact they might have on the markets.
Alan Greenspan famously remarked on “irrational exuberance” when referencing the stock market in the '90s, for instance. And a few years ago, European Central Bank President Mario Draghi stopped European market bleeding in its tracks when he said the bank would do “whatever it takes” to support the euro zone economy.
So, do words still matter – even if they are not backed up by actions?
Theoretically, the U.S. Treasury can engage in policies – specifically currency manipulation – to actively weaken the dollar and make U.S. exports more attractive via a weaker currency. But for the past several decades, U.S. administrations – the current administration included – have been ardent supporters of market-determined exchange rates.
There have been some U.S. interventions in the past related to the Japanese yen and the euro, but those were unique situations and undertaken in active cooperation with other governments. Unilateral currency market intervention certainly has been a topic for export-oriented countries like Japan, China and Switzerland, but in modern-era U.S., our government has not overtly pushed down the value of the dollar.
With the uncertainty around this topic, it will be particularly interesting to hear what Secretary Mnuchin has to say when he speaks to the Los Angeles World Affairs Council on Feb. 26.
We will be there, and listening closely to hear if Mnuchin utters the words “weak” and “dollar” together again.
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