Janet Yellen’s likely appointment as U.S. Treasury Secretary is unlikely to usher in a new exchange-rate doctrine but may see more sensitivity toward the dollar’s global impact.
Assuming President-elect Joe Biden appoints the former Federal Reserve chair to be Treasury chief, as widely reported, her vast policymaking experience means few shocks are in store for markets that are already assuming she will be as much of a fiscal policy “dove” as she was a monetary one at the Fed.
But despite expected post-election congressional gridlock, investors remain wary that a combination of unprecedented fiscal and monetary stimulus, alongside a broadening recovery of the world economy and more risk-taking could weaken the dollar dramatically as twin U.S. budget and trade deficits yawn.
Yellen’s appointment, they assume, only reinforces that picture as she’s a clear advocate of more government investment spending, keeps close attention to fragmented labour markets and inequalities and presided over easy-money policy at the Fed.
While Fed policy is often the dominant determinant of the dollar’s exchange rate, the Treasury officially holds the reins of currency policy and would, for example, be required to sanction any explicit dollar orientation one way or another or indeed any outright open market intervention to achieve the aim.
So Yellen’s dollar stance potentially packs a punch - alongside her past experience of, and future relationship with, the Fed over the broad sweep of economic policy.
That’s clearly something former Treasury Secretary Larry Summers was aware of this month in urging the new Treasury chief to avoid an “actively devaluationist or indifferent” take on the dollar, but rather deploy some oft-repeated public wording akin to the “strong dollar” mantra he and others adopted in the 1990s.
And the change is stark as it follows four years in which President Donald Trump - if not always his Treasury Secretary Steven Mnuchin - continually talked the dollar down in support of his protectionist trade policies.
Indeed, Deutsche Bank this week said it expects Yellen to largely follow the Summers recommendation - emphasizing the role of a stable dollar in domestic and global financial stability.
“Dollar policy can be expected to return to an even keel under Yellen,” economists Peter Hooper and Matthew Luzzetti wrote. “The Treasury will not direct the Fed to intervene to push the dollar one way or another, but it will coordinate with the Fed to intervene to smooth markets as needed in the unusual event that they become ‘disorderly’.”
IN HER OWN WORDS
But what of Yellen’s past influence and her own view?
Curiously, after years of publicly seeking a weaker dollar, the Trump administration didn’t have much success. The Fed’s broad trade-weighted dollar index is pretty much where it was when Trump was elected in 2016 - even if it has at least unwound a brief stress-related spike of 9% as the pandemic unfolded.
By contrast, the dollar index appreciated 15% during the four years Yellen led the Fed - a period during which she presided over the first interest rate rise in nine years just as the European Central Bank went in the opposite direction with the unprecedented step of pushing its policy rates below zero.
For one, it shows that someone considered to be an “uber-dove” can execute tougher decisions when necessary.
But it’s Yellen’s own description of that period that may be more revealing about her currency tack.
In a podcast recorded last year in her role at Washington’s Brookings Institution, Yellen explained how G20 meetings she had attended frequently criticised the Fed for not considering exchange-rate “spillovers” to the rest of the world - developing countries in particular - when it set domestic monetary policy.
But she said this criticism arrived whether the Fed was easing or tightening policy. In other words, complaints were really about the extremity of moves and not the direction per se - and she added the Fed was “sensitive to these concerns”.
Perhaps more relevant to her likely new role at Treasury, where she would ultimately decide if trade partners manipulate their currency for export advantage, Yellen was quite explicit about policy spillovers to China and cautioned strongly about equating domestic monetary priorities with manipulation per se.
She recounted how after years of concern that Beijing was capping the yuan for trade gains, the prospect of Fed tightening in 2015 led to massive capital outflows from China and a sharp yuan slide that unnerved global markets and, crucially, delayed the timing of Fed hikes.
“It seemed the Fed paused and that seems like a good example of this kind of realistic feedback,” she said, according to the transcript of the podcast.
Asked whether the Fed was basically making monetary policy for the whole world, Yellen cited former Fed chair Alan Greenspan’s speech during the emerging-markets meltdown of 1998 as the Fed eased policy into a still-booming domestic economy.
Greenspan explained it by saying the United States could not remain an “oasis of prosperity” in world economy in turmoil.
“I think that remains as true today as it was then,” Yellen said.
If those views hold true - and a pandemic might even have sharpened them - it seems unlikely a Yellen Treasury will stay silent if the dollar were to decline precipitously - let alone cheerlead its slide.
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