Jan 25, 2018

The pros and cons of a "weak" dollar

Treasury Secretary Steven Mnuchin rattled currency markets yesterday when he said “a weaker dollar is good" — a break in the habit of U.S. officials to publicly advocate for a "strong" dollar.

The facts
Data: U.S. Federal Reserve; Chart: Andrew Witherspoon / Axios
Why it matters

The dollar hit the lowest exchange mark in three years following Mnuchin's comments, after a slow drop over the past few months. While historically, U.S. Treasury Secretaries have spent more time praising a stronger dollar than a weaker dollar, both Mnuchin and President Trump have mentioned that a strong dollar can be harmful to the economy.

The breakdown
  • The strength or weakness of the dollar has the biggest impact on international trade.
  • The Federal Reserve's nominal broad index (used in the chart above) provides a weighted average of the dollar's foreign exchange values against the currencies of several major trade partners, including the Euro Area, Canada, Japan, Mexico, China, United Kingdom and others.
  • The strength of the dollar doesn't necessarily correlate to the state of the U.S. economy because it's always in comparison to the state of foreign economies. Even during the financial crisis of 2008, the U.S. dollar's exchange rate actually rose as it was still stronger by comparison to other countries.

Why a weak dollar could be good: It would make U.S. exports cheaper and easier to sell around the world. This is why Trump has often berated China for artificially keeping their currency "weak," in order to sell more goods at lower prices to foreign purchasers.

Why a weak dollar could be bad: The U.S. would have to pay more for imports making many goods more expensive for U.S. consumers. And as former Treasury Secretary Larry Summers wrote in the Financial Times, a weak dollar could lead to higher interest rates in the U.S. and currency wars with other countries as they compete to have the cheapest currencies.

Bottom line: today in Davos, Switzerland, Mnuchin clarified his dollar comments:

“There are benefits of where the dollar is and there are costs of where the dollar is ... I thought my comment on the dollar was actually quite clear ... It was balanced and consistent with what I said before, which is we are not concerned with where the dollar is in the short term.”
— Mnuchin in Davos, according to Bloomberg News
Data: U.S. Federal Reserve; Chart: Andrew Witherspoon / Axios

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