Mnuchin Says US Won’t Intervene To Weaken Dollar – For Now

The US has “no intention” to intervene in the currency market to weaken the dollar – or at least not right now.

That’s according to Steve Mnuchin, who chatted with Bloomberg during an interview in Washington on Wednesday.

The Treasury Secretary weighs in at a time when speculation about the prospect of outright, active intervention is running rampant thanks to the president’s professed disdain for the resilient greenback, which he views as a serious impediment to “winning” what has become a multi-sided trade war.

Read more in our dollar intervention archive

Trump’s bombastic Friday tweets following Jerome Powell’s speech in Jackson Hole were seen as raising the odds of intervention materially. “We have a very strong dollar and a very weak Fed”, Trump said, before promising to “work ‘brilliantly’ with both”.

Mnuchin told Bloomberg on Wednesday that the administration has weighed taking steps to counter the dollar’s rise. “Situations could change in the future but right now we are not contemplating an intervention”, he went on to say.

As a reminder, Treasury doesn’t have very much ammunition in the grand scheme of things. The Exchange Stabilization Fund is small in absolute terms and tiny compared to the FX market. Here are the technical details of how Mnuchin can effectively marshal the entire $94 billion in the ESF (from a Barclays note):

The ESF’s actual intervention power is often understated, but even at its maximum extent, it remains tiny relative to the ‘very, very large, liquid markets’ of FX, in the words of Mr. Mnuchin. While the ESF’s dollar holdings total only $22.6 billion, it has the ability to issue ‘SDR Certificates’ equal in value to its SDR allocations to the Federal Reserve in exchange for USD. Additionally, it can ‘warehouse’ its euro and yen holdings with the Fed through an FX swap, but requires Fed FOMC authorization to do so. The outstanding FOMC authorization for warehousing currently stands at $5 billion, but in the past the FOMC has authorized as much as $20 billion. However, even assuming warehousing of all the ESF’s euro and yen assets, its $94.6 billion in total assets would represent just 2% of average daily FX transactions involving USD.

The Fed would be compelled to match that, effectively doubling Mnuchin’s firepower. Some on the FOMC would doubtlessly dissent against any such move. After all, there were two dissents last month on a 25 bps rate cut, so one can only imagine what the reaction would be if Powell came to his colleagues with a tacit mandate from Mnuchin to conjure up $90 billion for the purposes of helping the White House drive down the dollar.

But, in theory anyway, Powell has unlimited ammunition. “Were the FOMC fully on board with an effort to depress the exchange value of the dollar, because the Fed has the ability to create dollars by fiat, it could sell unlimited quantities”, Barclays went on to remark, in the same note cited above.

The bank cautioned that marshaling the Fed for a full-on assault in the FX market “would almost certainly require complete politicization”. That, in turn, would doubtlessly prompt calls from lawmakers for Powell to testify about any effort to assist the White House in the trade war.

Given that, it’s more likely that Trump will simply continue to demand rate cuts and suggest, as he did on Tuesday, that the Fed’s reluctance to ease aggressively is undermining US manufacturers.

Without the support of other nations and absent a captive Fed, dollar intervention wouldn’t likely be effective over the longer-run, although it would almost surely inject some volatility into markets, quite possibly rattling sentiment as the world ponders the prospect of never-ending, tit-for-tat interventions.

Historically, interventions are not rare, but they are in recent times, which, when considered in conjunction with the prevailing geopolitical environment, means unilateral action would not be received well by America’s trade partners.

Mnuchin’s comments to Bloomberg aren’t likely to sway anyone when it comes to convincing market participants that the administration won’t one day decide to try intervention. Peter Navarro has reportedly championed the idea, and if the PBoC were to stop supporting the yuan with stronger-than-expected fixes, one imagines the White House might lose patience quickly if the Chinese currency careened rapidly weaker. Also, don’t forget that there is little chance of Powell “out-easing” (so to speak) the ECB next month.

Dollar strength amid relative outperformance from the US economy risks importing disinflation at a time when the Fed is already struggling to hit its mandate. Some analysts have suggested that makes aggressive rate cuts all but inevitable.

Read more: Fed Cutting Rates To Zero ‘Eminently Plausible’ After Friday’s Events, One Bank Says