The Strong Dollar Lobby is Crowing. But what about the pro-equilibrium lobby?

October 10, 2014


The strong dollar crowd is oddly crowing about how the US dollar is strong and the old days of worrying about currency wars are past.

That's an odd thing to claim when we are in the midst of global currency wars now.

This article is one example of journalists assuming the dollar's rise is a pure market phenomenon and that a "strong dollar" is good.  The Econ 101 crowd seems to have never read Econ 101.  Because the issue is that you want a currency - indeed all currencies - that accurately reflects the underlying economic strength. In other words, the economic strength or weakness comes first and the currency valuation results.

There should be a Pro-Equilibrium Dollar lobby (PED lobby... don't you think everything needs an acronym?) that crushes the Strong Dollar and Weak Dollar folks. Indeed, the PED lobby would have sound economics behind them.

The Strong Dollar folks have a massive and inconceivable blindspot that ignores foreign government manipulation of exchange rates - and I mean direct manipulation through intervention in foreign exchange (FOREX) markets.  There is a part of the Strong Dollar lobby that complains about the US Fed printing money, which has a less direct impact on relative exchange rates. 

Two core issues are (1) the method of central bank action - direct intervention in FOREX markets vs. quantitative easing or other domestic moves and (2) the direction of the currency movement - towards equilibrium or away from equilibrium.

So the first lesson is that if you don't like what the US Fed is doing, where have you been on the foreign government intervention.

The second lesson is that if you are a Pro-Equilibrium supporter, then you want any central bank action to move the currency towards equilibrium - not away from equilibrium.  Thus, Japan actions moving the yen lower when the equilibrium price is higher, should be attacked.  If the dollar is too strong, Fed action that result in weakening the dollar should be supported because it is pro-equilibrium action.

IMF rules are actually pro-equilibrium.  The financial commentators talking about strong or weak dollar policies are basically all wet.

That same article linked above asserts that Treasury Secretary Jack Lew recently said he is a strong dollar supporter. Wrong. Lew actually said is this:

[M]y job number one is to make sure we have a strong economy... . I think like all my predecessors, that I believe a strong dollar is good for the United States, but I believe first and foremost what we have to focus on is the fundamentals of the US economy.

Taken in context, Lew said what I said.  You want a strong economy first and the dollar value should follow.  If you have a weak economy, you want the dollar to weaken so your export pricing falls, you export more and import less, you employ more people and then you recover.

But Lew continues to resist taking action against direct intervention in FOREX markets and other action to cause competitive devaluation for a trade advantage.  The House and Senate currency manipulation bills (HR 1276 and S 1114) would help fix that by classifying that manipulation as an export subsidy that we would then neutralize (not punish, neutralize) with a countervailing duty.

Below is the video of Secretary Lew's comments before the Peterson Institute of International Economics this week, as well as excerpts from the transcript relative to currency issues.

Vikas Bajaj - interviewer: Well, some argue that at the moment then it’s perhaps in the interest of the American policy community to see a strong dollar and to see weaker currencies elsewhere in the world to help do that just what you said, to bring the rest of the world up with it.

Jack Lew:  As I said just a few minutes ago, my job number one is to make sure we have a strong economy and I think we do have a strong economy, I think that our economy is doing better relative to other economies in many instances. I think like all my predecessors, that I believe a strong dollar is good for the United States, but I believe first and foremost what we have to focus on is the fundamentals of the US economy. And for me that means not just saying, “Well, we’ve come a long way since 2008.” It’s what do we do to build a foundation that helps us lift the economy as we go forward?


Audience question: [Inaudible 00:17:46] chairman of ISI, she’s an independent broker dealer. I wanted to ask you a little bit more if I may on the currency side. In recent weeks we’re seeing significant moves in global currencies. Some of these are the results of the divergence in the underlining economies between the US and for instance, the Eurozone and Japan, but we’ve also seen policymakers in particular in Europe really make quite explicit calls that they, in their view, it’s appropriate that their currency should depreciate against the US dollar.

Are you comfortable with that and do you believe that as long as other policymakers restrict their policy actions to domestic assets and don’t get engaged in, for instance, some sterilized currency intervention, then that is acceptable within the rules of the game in a G7, G20 context?

Jack Lew:  In the context of the G7 and the G20 we’ve had many discussions on this in G7 principles that were agreed to two years ago, February, that the right formula is domestic tools for domestic purposes is one that we continue to believe is right and the nations of the world continue to articulate support for.

I think that it is wrong to get into exchange rate competition for the purpose of promoting advantage one over the other. On the other hand, we have called on many countries in the world to take decisive action to get their economies to grow. And the language that was agreed to in the G7 meetings at the beginning of 2013, I think was the right formula and is one that we should all stick to.


Audience question:  Hello, I’m Phil Suttle from [inaudible 00:19:35] Investment Corporation. If you don’t mind I’ll follow-up with the other exchange rate question, which is China. For a long time the US has held a position, at least as I understand it, that China’s currency needs to appreciate further. I’d be interested in an update in your thinking on that matter.

Jack Lew:  Well, I think we’ve been very clear. We continue to believe that there’s a need for appreciation in the RMB. There’s been progress since 2010 no doubt, but they’re still undervalued. There’s space for more appreciation and a need for the policies that let the RMB get set at a market level without intervention and without the kinds of pressures that we’ve seen in the past.

At the Strategic and Economic Dialogues in July, in Beijing, we had very good discussions on this. I think we made some significant progress on a conceptual basis where there was an agreement to limit interventions and there was an agreement that China would go through the process of a beginning to come within the IMF transparency protocols. I think both of those need to go to the next step. We need to see an end to interventions on an economic routine basis. And we need to see the move for more transparency.

I think that our message on that has been entirely consistent, really for many years now. As we’ve seen some progress we’ve tried to recognize that, the widening of the RMB, the trading band to, really to deal with some shocks too from external transactions that were coming into China’s economy. That’s something that we saw as a move to permit more market determination of their currency. We now have to see the follow-through. We were not as pleased when we saw interventions in the spring where it appeared to us to be driving down the exchange rate over the last couple of months; that has subsided.

This is not a question of going back and forth. What we need to see is the sustained path where China, really moves to a much more market- determined exchange rate. I believe that’s in China’s interest. China has great ambitions as a world economic power. They want the RMB to be a much more accepted worldwide currency and this is one of the prerequisites that they’re going to have to meet. So while we think it’s very important in terms of maintaining a fair environment for trade, it is also something that I believe is in their long-term interest and I’m very hopeful that we’ll continue to make progress on it.

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