International Economic Law and Policy Blog

Does the Trump Administration Want a Strong or a Weak Dollar?

In a recent post, I brought up some of CEA Chair Stephen Miran's comments on the role of the dollar as the reserve currency, and wondered what the Trump administration's plans were on the value of the dollar:

... [Miran] makes clear that he wants the dollar to remain the reserve currency (during the Q & A, he said "dollar dominance is a great thing"), but it's clear that such a policy will limit the prospects for any adjustment taking place. Maybe he is saying that his "burden sharing" options can operate as an alternative way to reduce deficits, even with the dollar remaining as the reserve currency, but that has the problems noted above (among others). Or do they have in mind a plan to weaken the value of the dollar while keeping its role as the reserve currency? Would Trump be OK with that plan? I hope someone presses them on these questions.

Last week, I was excited to hear someone better placed than me to get an answer press the administration on these questions. At a House hearing with Treasury Secretary Scott Bessent, Rep. Bill Foster (D-IL) asked the following about a strong vs. weak dollar (starts at 1:15:25 of the video):

Foster: I'd like to speak today about the strength of the US dollar and the decline of US manufacturing. ... in terms of the strength of the dollar, it's affected by many things, including central bank policies, interest rates, tariffs, and the balance of trade. But in the long run, I believe that the strength of the dollar reflects the world's confidence in the US economy and the competence of US leadership and the value of products made by American workers and our reputation as a fair place to do business and the rule of law in America. Now, Secretary Bessent, earlier this week, you ran an op-ed in the Wall Street Journal, echoing many of the points you made in your testimony. And in that op-ed, you promised, inter alia, more jobs, more manufacturing, more deregulation, lower taxes, less national debt, all while maintaining a strong dollar. On the other hand, Stephen Miran, Trump's choice for the chair of the Council of Economic Advisers, wrote a paper last year, arguing for weakening the dollar through something he called the Mar-a-Lago Accords, which you have reportedly been placed in charge of negotiating. The President himself has just been all over the map on almost a daily basis, on whether a strong dollar or a weak dollar will make America great again. So my question is, what is it? Does the administration support a strong dollar or a weak dollar?

Great question! Maybe we'll finally get some clarity here!

Bessent began his answer this way:

Bessent: I'll work a little backwards. [The] Miran paper was when he was in the private sector, and I think it related to a range of outcomes. ... I believe that the conditions for a strong dollar, they are important for international competence. And again, when we think of strong dollar, what is a strong dollar? Is it the composite on the Bloomberg of all currencies? Is it a trade weighted dollar? And then we can also look at bilateral relationships, because much of that could be not so much a strong dollar, but other countries manipulating and suppressing their currencies ...

It's not clear whether that response was leading up to an answer, and at that point Foster jumped in again:

Foster: We lived through that in the Bush administration, and his non-reaction to what China was doing, I know all about that. But I think it's interesting to look at the historical record here. I think I have behind me, you know, a plot of the strength of the US dollar under recent presidents. ... And what it says is remarkable. It says that under every president, from every Republican President, Reagan, Bush, Bush Junior, Trump one or now Trump two, the dollar has weakened. Under every Democratic president, without exception, Clinton, Obama, Biden, the dollar has gone up significantly. And I don't think that's an accident. I think it's because of all the factors we've included, predominantly the confidence that the US will maintain a well regulated and and well governed economy and a fair place to do business. ... The argument in favor of weak dollar. It should make manufacturing easier in the United States, ... that's one of the arguments for it. But if you look at the historical record here, if you just look at, for example, change in manufacturing employment under Democratic and Republican presidents, it's remarkable. For longer than you or I have been alive, Democratic presidents have increased manufacturing employment, and Republican presidents have decreased manufacturing employment. You know, from FDR, Truman, Kennedy Johnson, Carter, Clinton, Obama and Biden, all increased manufacturing employment. Eisenhower, Nixon, Ford, Reagan, Bush, Bush II, it all dropped. I don't think this is an accident, but the thing I want to ask you about is, how did the Republicans manage to weaken the dollar and weaken manufacturing employment at the same time? Because it seems like that's completely crossways to the narrative that we're hearing from this administration.

I was on the edge of my seat waiting for more, but then unfortunately time expired. I think Bessent is now supposed to answer this question in writing. We'll see what he comes up with.

The Impact of Exchange Rates on Trade

From Canada's Financial Post:

... The data is clear that Canadian consumers can save major bucks if they head south of the border to buy their goods.

A Bank of Montreal study released this month looked at a basket of goods and found on average Canadians were spending 20% more here on the same items that could be found stateside. With the dollar at par and now above, the discrepancy is clear.

Canadians have figured it out because spending in the U.S. has lurched ahead over the last year, according to Visa Canada. The credit card company says visitors spent $9.2-billion in the U.S. in 2010, more than triple of any other nationality, and an 18% jump from 2009.

As Mr. Wiginton found out, the savings can be huge when you get to the big ticket items.

“Buying a car in the U.S. was a bit of challenge because there is so much to figure out to do that,” says Mr. Wiginton, who looked for a car manufactured in North America that would be covered by the North American Free Trade Agreement and therefore not subject to duty. “I paid $18,000 and change for a $26,000 car. There was no HST at the time, so I just had to pay GST, there were no other fees.”

"the U.S. dollar just ain't what it used to be"

From Reuters:

In the latest example that the U.S. dollar just ain't what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.

"We had decided that money is money and we'll take it and just do the exchange whenever we can with our bank," Robert Chu, owner of East Village Wines, told Reuters television.

The increasingly weak U.S. dollar, once considered the king among currencies, has brought waves of European tourists to New York with money to burn and looking to take advantage of hugely favorable exchange rates.'

For some reason, the fall in the U.S. dollar doesn't concern me that much.  In part, that's because our subscription service has a lot of export sales, so it helps our competitve position.  But even thinking about the issue more generally, isn't the problem essentially self-correcting?   As noted in the article, the weak dollar will stimulate U.S. sales to foreigners, boosting the U.S. economy and, probably, the dollar as well.  It's true that if the U.S. economy were collapsing, or inflation were out of control, the problems might not correct themselves so easily.  But that doesn't seem to be the case.

Some Support for a WTO Agreement on Currency Manipulation

I've said before on this blog (see, e.g. here) that WTO rules on exchange rate manipulation would be useful.  I didn't have any detailed proposal in mind; it was my gut instinct plus some very basic arguments.  Well, now I can cite to some top-notch economists who support the idea.  In an op-ed piece, Arvind Subramanian writes:

India could work toward multilateralising the exchange rate issue. And here’s the punch line: this multilateralisation should be in the context of the WTO rather than the IMF. In a new paper, Aaditya Mattoo of the World Bank and I offer suggestions on how the exchange rate can be made into a multilateral trade issue. The WTO is the obvious alternative to the IMF since undervalued exchange rates have large and direct trade consequences. What is needed is a new rule in the WTO proscribing undervalued exchange rates, which are in effect a combination of export subsidies and tariffs, each of which is currently disciplined by the WTO.

I haven't seen the paper online yet, but I'll look for it, because it would be nice to have some support for my off-the-cuff blog post views.  I agree with them in principle and I think something along these lines can be achieved.  No doubt the details will be very tricky, though.  I'm curious to see what they have to say in this regard.

Some Exchange Rate Items of Interest

Here are two unrelated items about exchange rates:

1. From Marginal Revolution:

Canadian shoppers taking advantage of the parity between the U.S. and Canadian dollars are leaving behind more than cash when the head home.

They're leaving behind their old clothes.

Some Canadian shoppers wear their new clothes home to avoid paying a duty when they cross back into Canada. The old clothes get left behind in parking lots, dressing rooms and restrooms at malls and shopping plazas in the Buffalo-Niagara Falls region.

This could have gone under the "trade in everything" theme, but I put it here because I have this next item to mention ...

2. From an AP story reported in various papers, regarding the increase in foreign buyers of U.S. real estate due to the dollar's fall:

The currency advantage is greatest for British citizens, given that each pound is worth well over $2. By contrast, the euro currently is worth about $1.45 while the Canadian dollar in recent weeks is hovering near parity with its U.S. counterpart.

Sigh.  If I'm reading this correctly, the AP reporter seems to think the strength of a currency is based on the absolute numbers.  Thus, under this view, the UK has a stonger currency than Canada because one British pound buys 2 US dollars whereas Canada's dollar only buys 1 US dollar.  This kind of confused thinking out there in the media can only make the policy debates more muddled.