As Yellen Takes Treasury Reins, Dollar Bears Emboldened

Janet Yellen isn’t going to pursue a weak dollar policy. Or at least that’s what she’ll tell lawmakers this week as she prepares to take the reins at Treasury.

“The value of the US dollar and other currencies should be determined by markets,” Yellen will say, according to officials who spoke to The Wall Street Journal, for a piece that was widely cited ahead of Yellen’s confirmation hearing. “Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy,” she’ll add.

In their coverage, the Journal alluded to the difficulty would-be critics of the incoming administration are likely to encounter at virtually every turn. Yellen’s comments on the dollar “would represent a return to the US’s hands-off approach, which President Trump had deviated from by often publicly calling for a lower dollar.”

Trump was so mercurial — he lacked a “lodestar,” as one official put it in an infamous Op-Ed for The New York Times — that it will always be possible to cite instances where he took either side of a given debate. The dollar is no different. In the summer of 2019, when Trump began to exert unprecedented public pressure on the Fed to assist him in the trade war and the market feared he might lean on Steve Mnuchin to intervene in currency markets, Trump, speaking to reporters at the White House, said the following:

I didn’t say I’m not going to do something. The dollar is very strong. The country’s very strong. The dollar — it’s a beautiful thing in one way, but it makes it harder to compete.

That’s just one particularly humorous instance of Trump attempting to strike an impossible balance between extolling the virtues of a “beautiful” “king” while fighting a multi-front trade war in which currencies were the most effective weapon.

Trump quickly dropped any pretense to decorum. The following tweets are no longer available (for obvious reasons), but I pulled them from the archive as a reminder of just how aggressive Trump was when it came to verbally intervening:

People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar &, Rates are hurting… — Oct 31st 2019 – 10:37:39 AM EST

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic! — Oct 1st 2019 – 10:34:45 AM EST

Federal Reserve not watching? Will Fed ever get into the game? Dollar strongest EVER! Really bad for exports. No Inflation…Highest Interest Rates… — Sep 16th 2019 – 7:47:56 AM EST

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!– Sep 12th 2019 – 8:13:09 AM EST

The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage…and the Fed does NOTHING! Our Dollar is now the strongest in history. Sounds good, doesn’t it? Except to those (manufacturers) that make product for sale outside the U.S. — Aug 30th 2019 – 9:55:41 AM EST

Trump did, of course, end up getting the weak dollar he wanted. The only problem is that by the time the greenback retreated to levels seen just prior to the trade war, currency policy was the least of the White House’s concerns.

While some lawmakers will likely quiz Yellen on her views given the dollar’s post-pandemic drop, she has the luxury of knowing that simply taking a generally uncontroversial stance (i.e., reiterating that markets and fundamentals should drive currencies) could be interpreted by the market as a green light to press bearish dollar bets, which are sitting at extremes.

As one analyst told Bloomberg Monday, “a commitment to market-determined exchange rates implies that the new administration will be comfortable with further dollar weakness.”

Of course, a weaker dollar is conducive to gains in risk assets and also to reflationary momentum, which, in turn, is key to the global economic recovery.

All of this will be viewed in the context of Yellen’s assumed coordination with a Fed she chaired just three years ago. Some lawmakers on Capitol Hill are likely to question her about this coordination and whether it takes the country further down the road to monetary financing.

You’ll note this is always a silly “debate.” Both sides feign ignorance. Treasury acts as though it isn’t simply selling debt to the Fed and the Fed pretends as though QE somehow isn’t deficit monetization because there’s a middleman involved. Lawmakers, meanwhile, only care about any of this when it suits their purposes. Deficits matter for Republicans only when the president is a Democrat, and Democrats (even Bernie Sanders) refuse to acknowledge that the spending plans of Progressives don’t need to be “funded” anymore than the CARES Act needed to be “funded” or anymore than the US needs you, the taxpayer, to “fund” the purchase of new fighter jets for the Air Force. The money is always just conjured from thin air. If you’re the government, you don’t need anyone else’s dollars. You’re the sole, legal issuer of dollars.

Don’t expect any kind of acknowledgement to that effect from Yellen or from the lawmakers who will quiz her this week. Rather, everyone will pretend that the deficit matters and that eventually, once the crisis is over, the US will need to “get its house in order.”

When it comes to the near-term prospects for the dollar, SocGen’s Kit Juckes weighed in Monday. “The net position in sterling and yen is slightly long now and growing [while] the net euro position is very long but trending down,” he wrote, adding that “the average is very long, i.e., very short of the dollar.”

Juckes continued, noting that while he “really [doesn’t] think the fundamental argument for expecting a weaker dollar this year is wrong, that doesn’t count for much in the short run, when positions are too extreme.”

The dollar has bounced recently, alongside US real yields which, while still deeply negative, are more than 10bps off the record lows.

If you’re the type who likes to fade consensus, just know that consensus is dollar bearish. As I’m fond of reminding folks, the biggest risk to the dollar’s reserve status isn’t any deficit or any “money printing.” Rather, the biggest risk is domestic instability, erratic foreign policy, and the ad hoc, willy-nilly weaponization of the US financial system.

All of those concerns are likely to fade with Trump’s exit.