Saturday, 17 February, 2018

Study Finds a Weak Dollar is Good for Emerging Market Assets

Davos 2018: 'More to come' on US trade tariffs Mnuchin sends the dollar sinking to a three-year low in Davos when he says weak currency is 'good for us'
Nellie Chapman | 29 January, 2018, 18:22

A day after sending the dollar reeling with comments supportive of a weak U.S. currency, U.S Treasury Secretary Steven Mnuchin said the Trump administration was not seeking a trade war but would defend its economic interests, Reuters reported.

Q: What's been the policy of recent administrations concerning the dollar?

Following Mnuchin's remarks, the U.S. currency took its largest tumble in 10 months, and the ramifications of the Trump administration's policy position on the dollar raised alarm.

Those dynamics aren't especially controversial, with USA goods looking cheaper overseas when the dollar softens-boosting sales.

"It's really dollar weakness, rather than sterling strength", Alan Clarke, an economist at Scotia Bank, told The National. A falling dollar when the economy is weak can be beneficial, boosting demand for USA goods overseas.

Also speaking in Davos, British chancellor of the exchequer Philip Hammond said a weaker dollar may help alleviate USA concerns about the "fairness" of global trade.

The dollar had continued its slide earlier Thursday on criticism of Mnuchin's initial comments from European Central Bank President Mario Draghi. He said that in the short term, there were "obviously benefits" from a weaker dollar.

A lower-valued dollar can be worrisome, in part because it makes US imports costlier and so can accelerate inflation, sometimes to worrisome levels.

PiperJaffray's Craig Johnson sees the metals sector getting a boost from weakness in the US dollar.

A falling dollar also makes foreign investment in dollar-denominated assets less attractive.

USA stock futures were all slightly up on Friday. The Treasury secretary also said that he is considering a trip to China later this year for discussions on how to shrink America's trade deficit with that country.

What monetary policy seeks is a balance between American purchasing power (best with strong dollar) and positive conditions for American-made goods on the global market (best with weak dollar). But in his shoes, at my next public appearance, I would say something like: "An economic truism about trade is not a policy pronouncement". For bonds, it could send US interest rates, which have been low for a decade, rising. But the dollar's price relative to other currencies over time has been a pretty good indicator of increased inflation expectations, and that has been showing up recently.

Despite Trump's claim that the Treasury secretary was misinterpreted, Mnuchin told reporters he thought his comment was "quite clear". "Market forces should determine the value of a currency, not policymakers".

DONALD Trump Jr said recently that the only colour his father sees is green. Mnuchin told the Wall Street Journal his comments weren't meant to intervene in the market and a strong currency would be a sign of the USA economy's success, echoing Trump's strong-dollar comments in a CNBC interview Thursday.