Last week, U.S. Secretary of Treasury Steve Mnuchin surprised some with his comments on the recent weakening of the U.S. dollar, stating that a weaker dollar was "obviously" good for the country, and that its short-term value is not a concern for the Trump Administration. This was a sharp departure from past treasury secretaries, who have generally held that a strong dollar has been and always will be good for the U.S.
The U.S. dollar has been softening over the past year, despite the Federal Reserve's measures to organize macroeconomic policy and raise interest rates.
The decrease of the dollar proposes possible advantages and disadvantages for the economy, depending on the rigor of its decline. On one hand, the controlled increase of currency could help the Federal Reserve lift inflation to its current target of 2%. In order to reach this outcome, import costs would have to increase, in turn boosting economic growth. Such a stimulus can have upshots, like reducing governmental debt more rapidly.
But if the decline of the dollar drops more than it should, the central bank might increase rates more rapidly, putting the economy in danger of slowing down - and ultimately only making the government's budget deficits worse. It also does not take into account that the modern U.S. economy is not based on import or export of goods, but rather of consumer spending and the service economy. It also runs the risk of sparking competitive devaluations, which would ultimately harm American interests.
Mnuchin's comment has drawn much ire. Lawrence Summers, Former Secretary of Treasury under the Clinton Administration, criticized Mnuchin's comment, saying that "there are good economic reasons the last seven Treasury secretaries stayed with the strong dollar mantra...Yes, a weaker dollar means cheaper U.S. exports. But it also means higher priced imports and so less purchasing power for American incomes. It is much better to strengthen our fundamentals than to make ourselves poorer by putting our goods on sale as we push our currency down."
Likewise, White House Press Secretary Sarah Sanders hedged when asked about Mnuchin's comments, refusing to state whether or not the White House agreed, and asserting only that the dollar is still "very strong." Trump also seemed to distance himself from Mnuchin, saying later via Twitter that he hopes to see a strong dollar. But prior to his inauguration Trump noted that a weaker dollar would be better for the country. Since his presidency, the dollar has decreased by more than 11 percent.
Some believe that Trump is deliberately trying to lower the dollar to boost manufacturing, increase U.S. competitive edge in the international export markets, and limit imports, all of which would be in line with his protectionist policies. Trump has not been shy about acting on these isolationist impulses, recently increasing tariffs on imported solar panels and washing machines. As part of his protectionist stance, Trump has also mulled withdrawal from NAFTA, which could hurt the dollar further, as it would lose flow in markets abroad.
Analysts are watching closely, as the Trump administration's stances have real-time effects: the dollar dipped to a three-year low after Mnuchin's comments aired.