If you go back to the 1990s, during the Clinton years, the US followed an explicit strong dollar policy. Every time you got Treasury Secretary Robert Rubin in front of a microphone, he said the US had a strong dollar policy.
And guess what? The dollar was strong.
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What are the benefits of a strong dollar?
A strong dollar strengthens the economy
When you have a strong currency, it is very difficult to export things. So your exporters and your manufacturers have to be very disciplined to keep costs as low as possible in order to be competitive overseas.
It takes all the slack out of your economy. It makes your economy a lean, mean fighting machine.
What if foreign competitors are subsidized? Too bad.
What if foreign competitors are dumping? Too bad.
What if foreign countries are keeping their currencies artificially weak? Too bad.
Actually, throughout the 1990s, it wasn’t just the US that wanted a strong currency. Most of the developed world did. If you recall, Europe wasn’t happy with the face-plant the euro did right out of the gates. It was a point of pride.
You probably recall that during the 1990s, interest rates were not zero. They were much higher. Just 15 years ago, Fed funds were 6.5%. They were 6.5% during the height of the dot-com bubble, which is a powerful incentive to be in cash.
Hindsight being what it is, that would have been awesome. But interest rates were high across the globe. Sure, savers benefit when rates are high, but there’s a bigger point here.
When interest rates are high, corporate America is disciplined. Why? Because when lots of money is going out the door for debt service, you have to economize on other stuff.
We had strong currencies and high interest rates. It was economic nirvana.
And people wonder why things are so bad today.
A Fed rate hike will strengthen the dollar
Unbelievably, throughout all the negative interest rates and money printing and currency devaluation, the US is still the best place for capital in the world.
And it is about to get better.
We got a taste of that at Jackson Hole where Yellen said that “the case had strengthened” for a rate hike. Then Fischer doubled down on it.
I’ve been saying for a while that monetary policy is probably going to be a lot tighter once we get the election out of the way. I think it’s not super likely that the Fed will hike in September, right before the election, but if we get a strong payroll number tomorrow, it’s in play.
I do think we could get 100 basis points of rate hikes in 2017. Ballpark.
This is not priced into the currency markets yet.
I have a hunch that 2017 is going to be a pretty good year for the USD. And it might be a great year for the USD if all these housing bubbles around the world pop simultaneously, and you have Canada, Australia, Sweden, Norway, and others all cutting rates. And I don’t see Europe and Japan tightening anytime soon.
I’d say that 60–70% of all currency movements can be explained by interest rate differentials. If the Fed is hiking and everyone else is cutting, the US dollar will get stronger. No doubt about it.
Jack Lew certainly has no interest in pursuing a strong dollar policy (and if Lael Brainard becomes Treasury Secretary under a possible President Hillary Clinton, that isn’t going to change). But I think it’s important to point out that Treasury hasn’t commented on FX movements much in recent years.
There was that spasm a few years ago when China was accused of being a “currency manipulator.” But outside of that, the US government hasn’t really talked down the dollar at all. Not even during that big rip last year. And I don’t think they will.
I think the dollar could run quite a bit further before anyone did anything about it.
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