Mnuchin's straight talk on dollar ruffles feathers for some reason

Mnuchin's straight talk on dollar ruffles feathers for some reason
© Greg Nash

Treasury Secretary Mnuchin could well have been giving an economics lecture in talking about foreign exchange markets while in Switzerland on Wednesday, noting that a weak dollar meant a near-term boost to American exports, while over a longer horizon, the value of the U.S. currency would reflect the strength of our economy.

That’s exactly what I tell students in my international economics class. I even teach using Paul Krugman’s textbook.

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Yet, currency markets swooned, with the dollar losing about 1 percent of its value against an array of currencies and falling to a three-year low against the euro.

 

What the uproar over the Treasury secretary’s remarks missed is that Wednesday’s market fluctuations merely punctuated a trend in which the euro has been gaining against the dollar since early 2017 on signs that long-somnolent European economies are finally seeing a sustained uptick.

Indeed, the strength of the dollar against the euro until a year ago reflected precisely Mnuchin’s diagnosis: U.S. growth from 2014 to 2016, while uneven and disappointing to many Americans, still outpaced the performance of key euro area countries.

Mnuchin’s remarks affected markets and contributed to the particular changes on Wednesday, but outside of one day, he is much more of an observer than a cause of the broader change in the value of the dollar.

To think otherwise is akin to attributing the New England Patriots’ playoff comeback against the Jacksonville Jaguars to the television commentators rather than to the efforts of the players and coaches on the field.

Knowing what will happen to future currency values is infernally difficult, but it is possible that Secretary Mnuchin will have an opportunity to re-emphasize his analysis later this year as the impacts of the recently-enacted tax cut are felt in the economy.

While the corporate tax rate reduction was aimed at improving the long-run U.S. growth trajectory, there will still be a near-term Keynesian stimulus impact from the overall legislation.

As dollars from the tax cut feed into the economy, we are likely to see U.S. GDP growth top 3 percent by mid-year and stay that way into 2019 — an outcome that might surprise observers who bought into doom-and-gloom predictions surrounding the signature economic policy achievement of the Trump administration (and one for which Mnuchin was a key participant, i.e., a player on the field). 

The tax cut will not propel a repeat of the 20-percent gain of the dollar against the euro from April 2014 to March 2015. That move surely reflected worries about European economies. But along with a monetary policy reaction as the Fed hikes rates, stronger U.S. growth would be expected to temper or reverse the dollar weakness.

There are plenty of potential complications, notably that market participants will increasingly wonder how our political system will deal with the looming fiscal imbalance — especially when the failure to address the issue eventually would undermine the dollar’s global role.

Still, global investors seem comfortable with U.S. markets for now, suggesting that fiscal concerns are likely to remain in the background for the next year or two, at least.

Secretary Mnuchin’s straightforward language — his honesty, really — meant volatility for a day and some awkward news stories. But Mnuchin could well have the ultimate satisfaction from seeing his analysis play out in the context of a strong U.S. economy this year.

If Mnuchin repeats his statement during a time when the dollar is appreciating, it will seem unremarkable — as merely a statement of economic principles. 

Phillip Swagel is a professor at the University of Maryland’s School of Public Policy and a senior fellow at the Milken Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.