Jim Rickards: Be Prepared For A Weaker Dollar And More Inflation
SilverDoctors.com
October 30, 2018
The Fed & the White House both want a weaker dollar & more inflation, which Jim says can be easily done by the Trump Administration alone. Here’s how…
by Jim Rickards of Daily Reckoning
When will the strong dollar weaken? Ultimately, the answer is whenever the Treasury wants.
When the Treasury is not overly concerned with the dollar, market forces can prevail to raise or lower the exchange rate compared with euros, Swiss francs, yen or any other currency.
Sometimes, other central banks intervene to raise or lower their currencies relative to the dollar and the U.S. does not seem to care. China is notorious for this. Japan and Switzerland are other practiced currency manipulators.
The last fully coordinated currency market intervention was conducted by the G-7 in March 2011 at the time of the Fukushima, Japan, earthquake and tsunami that caused the collapse of a nuclear power plant and ultimately a crash of the Tokyo stock exchange.
The Japanese economy was weakened by the natural disaster. A weaker yen would have helped the economy with cheaper exports and more inflation. But insurance companies had to sell dollar-denominated assets and buy yen in order to pay yen-denominated claims for the disaster losses. The result was a stronger yen.
The G-7 intervention, organized by then French Finance Minister Christine Lagarde, successfully sold yen and bought euros, dollars and sterling to weaken the yen despite insurance companies buying it. Lagarde’s success in this intervention was instrumental in her elevation to head of the IMF shortly thereafter.
In short, except in extraordinary circumstances, the U.S. Treasury does not directly intervene in currency markets to target U.S. dollar exchange rates. If such targeting is needed, the Treasury will work with the Fed to raise interest rates or take a pause in rate hikes to affect the dollar’s value.
All of this may be about to change.
Both President Trump and Treasury Secretary Mnuchin have publicly expressed dismay at the dollar’s persistent strength in the second half of 2018. A strong dollar has adverse effects relative to Trump’s economic plans.
It makes imports less expensive, which has a deflationary impact on the U.S. domestic economy. This is at a time when both the Fed and the White House would like to see more inflation.
A strong dollar also hurts U.S. exports from major companies such as Boeing and GE. That hurts U.S. competitiveness and U.S. jobs. Finally, a strong dollar hurts corporate profits of U.S. global companies because their overseas profits are translated back into fewer U.S. dollars. This is a head wind to U.S. stock market performance.
U.S. Secretary of the Treasury Steven Mnuchin and his wife hold a sheet of freshly printed dollar bills during a visit to the U.S. Bureau of Printing and Engraving. The dollar has been strong during most of the Trump administration since early 2017. However, the strong dollar causes deflation and reduced exports. Trump and Mnuchin will soon weaken the dollar to boost growth.
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