End of the 'strong dollar' policy
The end of U.S. leadership is on everyone's lips. Today's installment is the Treasury secretary's endorsement of a weaker dollar. Not so fast. Despite the way the ideal of a "strong dollar" has been thrown around in official rhetoric the last couple of decades, the reality is that Treasury secretaries of both political colors have dialed it up and dialed it down to suit the needs of the moment. At various points along the way the "strong dollar" was said to have been ditched. It's been declared dead many times, but never seems quite buried.
Observers may be suffering from some confirmation bias this week. Because the Trump administration has made so many deeply flawed decisions that surrender America's pre-eminent role, it's easy to see Secretary Steven Mnuchin's remarks as a big, dramatic shift for the worst. I wish I had a portrait of George Washington for every time someone has pronounced the end of the "strong dollar" policy. I remember sitting in Bloomberg's London newsroom hearing that the sky was falling when Paul O'Neill and John Snow, the first two Treasury chiefs under George W. Bush, veered from the script developed by Robert E. Rubin, who held the post under Bill Clinton and is most closely associated with the term. People quickly moved on, and it wasn't the end of civilization.
One particularly excited call to me from a reporter accompanying Snow to a Group of Seven meeting in Normandy in 2003 comes to mind. The shift was real; the consequences so small they struggle to be remembered. Snow tried to focus on what a "strong dollar" actually was. Hard to counterfeit, a store of value that reflected "demand and supply for currencies." Not a bad idea. People just didn't want to hear it. It all got lost in the noise of "abandoning the strong dollar." Perhaps it was because people just didn't like Bush.
Earlier in Bush's term, O'Neill was crucified for having the temerity to suggest to the Frankfurter Allgemeine Zeitung newspaper in 2001 that "we don't follow, as is often said, a policy of a strong dollar." Rather, he said, the U.S. favors a strong economy. The logic being that a strong economy would be reflected in a strong dollar. So great and so instant was the uproar that O'Neill's spokeswoman recanted to traveling reporters in rushed conversation at a Milan airport. Whatever else O'Neill may have wanted to talk about at the G7 meeting in Sicily that weekend, it was completely drowned out by his protestations that the strong dollar hadn't been ditched. He said he'd hire a brass band in Yankee Stadium to announce it, if he ever did. Even the man often portrayed as the master of currency-market messaging, Rubin, wasn't averse to massaging the beloved strong dollar line when needs suited. For one, in early 1997, Rubin noted that the dollar had been strong "for some time now," leading traders to speculate that Team Clinton didn't want its beloved strong dollar to get too much of a good thing.
And Rubin wasn't beyond selling the dollar either. He did that in 1998, largely to rescue the yen, but you get the picture. The dollar was sold again, in 2000, under Larry Summers to prop up the euro, then in its infancy. The "strong dollar" mantra has taken on some mythology that was never really there in practice.
Every pronouncement on the dollar needs some historical context. When Rubin arrived at Treasury in 1995, the dollar had been beaten up by the yen and what was then the German mark. The first two years of the Clinton administration, when Lloyd Bentsen was Treasury secretary, had been characterized by trade clashes with Japan. Important point here: While the latter Clinton years were seen as the glory days of free trade and free markets, the first two years had a distinctly protectionist vibe to them. So while some things change, others seem familiar. There's no guarantee Trump's tenure will turn out the same way, though administrations do tend to become more multilateralist the longer they stick around.
Finally, the ability of Treasury secretaries and finance ministers in general to fundamentally rock the currency world has diminished greatly over the years. The Plaza Accord of 1985 was a seminal event in post-war economic history because the moves it initiated were so great and so lasting. And perhaps because James Baker, then the Treasury secretary, is so revered.
And also because the few economies represented at Plaza -- it was then the Group of Five -- accounted for so much more of the world economy. You have to remember that in 1985, the Soviet Union still existed and China was yet to really get going. Neither really had markets to speak of. So if you think Mnuchin's comments mark the end of an era or signify something dramatically new, you might be right. Then again, you will probably be right again during his tenure or, if history is a guide, under his successor. The strong dollar keeps giving. Even in its grave.