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Dollar weakness strong from perspective of known economics

Treasury Secretary Mnuchin’s suggestion at the same conference (CNBC link courtesy of New York Times Dealbook Briefing email) that the dollar might weaken without bothering U.S. economic policymakers drew generally skeptical responses from mainstream observers including Ben White’s article in Politico.com and the people quoted therein. The Fed plans to continue raising the federal funds rate and unwind quantitative easing–moves that will have a strengthening effect if anything on the dollar. The tax reform–while badly tilted toward wealthier taxpayers–is at issue in these hawkish comments. Anything that reduces the value of the dollar tends to increase exports and reduce imports through impacts on import and export prices.

The critics equate such effects broadly with more or less selfish or narrowly nationalistic policies that help one country at the expense of others. Yet as long as they are mainly the incidental byproduct of domestic-policy moves, they have the benefit of not singling out particular countries (as in some Administration rhetoric and policy actions) and of addressing the neglected [by economists] role of export-oriented sectors in the U.S.). The issues connected with domestic policy can then be taken on in their own right when opponents get their chance–as in the debate over cuts to CHIP and other safety net programs that should not and need not happen!

A weaker dollar may also tend to be better for less-developed countries (and their creditors) on average than mainstream economists have traditionally argued. For one thing, it weakens the burden of debt denominated in dollars–a problem for many countries. There are many reasons to hope that efforts will not be strong to keep the exchange rate of the dollar strong. Otherwise, the forces for fiscal austerity and monetarist-style inflation obsession in monetary policy will only strengthen.

Postscript: With yet more coverage, the FT’s “Big Read” provides in-depth analysis of recent dollar-talk.

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