US 'strong dollar' policy rings increasingly hollow: McGeever
It was former Treasury Secretary Robert Rubin who, 30 years ago in early 1995, declared that "a strong dollar is in our national interest," articulating what has become one of the fundamental tenets of the modern global financial system.
The 'strong dollar' policy has always been about more than just the exchange rate, although a more expensive currency can help keep inflation and interest rates low. This policy has represented the world's trust in the U.S., and, consequently, the greenback's role as the lynchpin of the global economy.
But times have changed since 1995. A lot. The world today is losing faith in the dollar, losing trust in the government institutions backing it, and losing confidence in America's role as leader of the 'free world'.
Back then, the North American Free Trade Agreement was in its infancy, China was about to emerge as an economic force, globalization was accelerating, trade and regulatory barriers were being torn down, and global capital flows were exploding. The dollar was pivotal to all that and it soared for the next seven years, right up until the dotcom crash.
The dollar slumped around 40% in the following seven years to the Global Financial Crisis and then drifted for several more years after its post-Lehman surge. But this didn't stop central banks from growing their dollar FX reserves to $4.5 trillion in 2015 from around $1 trillion in 2001.
That was a strong dollar, the world's reserve currency in its prime.
PRESSURE AT THE LONG END
The dollar has remained dominant by any measure. Central banks' dollar holdings have largely flat-lined for the past decade, but private sector buyers have increased their exposure significantly. The greenback is still the most dominant currency in FX reserves, global trade and financial market trading.
But as Steven B. Kamin, senior fellow at the American Enterprise Institute, and Mark Sobel, U.S. chairman at the Official Monetary and Financial Institutions Forum, have written, future dollar dominance rests on three factors: "preserving the underpinnings of the dollar's global role; maintaining trust in the U.S. as a reliable partner; and avoiding overuse or abuse of financial sanctions."
Doubt now hangs over all three as the Trump administration's 'America First' agenda has caused foreign investors to look at the dollar in a new light.
Last November, before his confirmation as Chair of the U.S. Council of Economic Advisers, Stephen Miran published a paper, 'A User's Guide to Restructuring the Global Trading System', in which he argued that the dollar, from a trade perspective, is "persistently over-valued in large part because dollar assets function as the world's reserve currency."
Perhaps more importantly, he also noted that while Trump supports the dollar's reserve status, he had floated "substantial changes" to dollar policy. "Sweeping tariffs and a shift away from strong dollar policy can have some of the broadest ramifications of any policies in decades, fundamentally reshaping the global trade and financial systems."
This will be achieved by a range of policies aimed at getting the rest of the world to share more of the "cost" America bears for providing the reserve currency, Miran argues, rather than replacing the dollar. Tariffs are clearly Trump's policy of choice.
The dollar will fluctuate in value and its dominance as the world's sole reserve currency may continue to slowly diminish. The Treasury Secretary will probably always pay lip service to the "strong dollar" policy - they have a duty, after all, to help keep borrowing costs low.
"It can be wheeled out in times of need and when the Treasury Secretary worries about the long end of the curve," says Steve Englander, head of global G10 FX Research at Standard Chartered.
Bessent's reaffirmation this week of Washington's 30-year-old stance, therefore, was perhaps no surprise. But it probably fell on deaf ears.
(The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever; Editing by Nia Williams
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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