USD remains under pressure – BBH

The dollar remains under pressure, with this latest wave of selling brought on by comments from US Treasury Secretary Mnuchin, explains the research team at BBH.  

Key Quotes

“Whilst in Davos, he noted that “Obviously a weaker dollar is good for us as it relates to trade and opportunities.”  While Mnuchin was only stating the obvious, Treasury Secretaries since Robert Rubin have never deviated from the strong dollar mantra.  That mantra has never really meant much, but to deviate from it suggests that US policymakers desire a weaker dollar.  Rubin started this “policy” after his predecessor Lloyd Bentsen used the exchange rate to pressure Japan into opening its markets.  Mnuchin's comments pack an even bigger punch coming after the US trade actions announced this week.”

“The market responded by taking the greenback to new multi-year lows against the euro and sterling while pushing it below the JPY110 level for the first time since last September.  The comments came on the heels of US trade actions yesterday, and this has become latest element of the narrative the seeks to explain the dollar's slide and the decoupling of the greenback from interest rates.”  

“There are two broad explanatory models of currency movement that seem to be prevalent among investors.  The first focuses on the relative price of capital (interest rate differentials) and the trajectory of monetary policy.  The second focuses on external imbalances (trade and current account).  The seeming decoupling of the US dollar from the movement of interest rates has seen greater emphasis placed on the latter.  The tariffs the US has imposed on solar panels and washing machines draws attention to the deterioration of the US trade balance.”

“We too have noted that despite the striking improvement of the US energy trade balance, there has been notable deterioration of the non-oil balance.  Yet, it seemed that the capital flows were sufficient to offset it, and the broader current account deficit as a percentage of GDP has been fairly steady over the last few years near 2.4% of GDP.  This is less than half the size of the pre-crisis levels.”

“The incentives provided in the recent tax bill for companies to repatriate overseas earnings likely heralds a dramatic improvement in the US current account balance.  The lion's share of the earnings that have been retained abroad is already in dollar-denominated investments, according to various accounts and reports.  However, when it is brought back into the US, it is picked up in the current account measure of investment income and will offset part of the trade deficit.”

“The sanctions that the US imposed on solar panels were slightly less than those sought by the US-based International Trade Commission.  And both the solar panel and washing machine actions were seen as narrow and limited rather than broad and disruptive.  There are other issues pending - steel, aluminum and intellectual property.  China's response is still awaited.  It has complained, of course, but in 2011, the last time US imposed tariffs on solar panels, China retaliated against importing US-sourced polysilicon that is used to make the panels.  It is not clear if or how China will respond.”