Strong dollar policy

The strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar (where a smaller dollar amount is needed to buy the same amount of other currency than would otherwise be the case) is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury securities. The United States Secretary of the Treasury occasionally states that the U.S. supports a strong dollar. Since the implementation of this policy in 1995 by Robert Rubin, the dollar has declined substantially. Despite this, the policy keeps inflation low, encourages foreign investment, and maintains the currency's role in the global financial system.[1]

Background

Exchange rate weapon

The term "exchange rate weapon" was introduced by Professor of International Economic Relations at the School of International Service at American University Randall Henning to describe the threat of manipulating the exchange rate of a strong country's currency with that of a weak country's currency, in order to extract policy adjustments from their governments and central banks.[2] The strong dollar policy arose in response to the use of the exchange rate weapon.

Strong vs. weak dollar

A strong currency helps domestic importers as their currency buys more, benefits foreign exporters as their exports garner more, hurts domestic exporters as there are not as many foreign buyers, and harms foreign importers as they cannot buy as much. A weak currency does the opposite of the above. They are summed up in the tables below.[3]

Strong Dollar
Advantages Disadvantages
Consumer sees lower prices on foreign product/service U.S. firms find it harder to compete in foreign markets
Lower prices on foreign products/services help keep inflation low U.S. firms must compete with lower priced foreign goods
U.S. consumers benefit when they travel to foreign countries Foreign tourists find it more expensive to visit the U.S.
U.S. investors can purchase foreign stocks/bonds at lower prices More difficult for foreign investors to provide capital to U.S. in times of heavy borrowing
Weak Dollar
Advantages Disadvantages
U.S. firms find it easier to sell goods in foreign markets Consumers face higher prices on foreign products/services
U.S. firms find less competitive pressure to keep prices low Higher prices on foreign products contribute to a higher cost-of-living
More foreign tourists can afford to visit the U.S. U.S. consumers find traveling abroad more costly
U.S. capital markets become more attractive to foreign investors It is harder for U.S. firms and investors to expand into foreign markets

History

1971–1973

In spite of the Bretton Woods agreement, United States (U.S.) officials suspended gold convertibility and imposed a ten percent surcharge on imports in August 1971. This prompted the G-10 Smithsonian Agreement, a temporary agreement negotiated in 1971 among the ten leading developed nations in the world. The agreement pegged the Japanese yen, the Deutsche Mark, and the British pound sterling and French franc at seventeen percent, fourteen percent, and nine percent, respectively, below the Bretton Woods parity.[4] These proved unsustainable.[5] Later in 1971, U.S. officials permanently floated the dollar; a second devaluation of the dollar against major currencies and a permanent “float” of major European currencies against the dollar followed in February 1973.[6] When the dollar fell in value, the U.S. did little to slow or reverse the fall; this dollar slump incentivized European and Japanese officials to deliver expansionary policies.[7]

1977–1978

In 1977 the Carter administration advocated and initiated the “locomotive theory”, which posits that big economies pull along their smaller brethren. Carter’s theory asked for concessions from the smaller countries to benefit the U.S. for the high price the U.S. has incurred for their benevolence after the 1973-75 recession.[8] The American initiative met with staunch German and Japanese resistance at first. In response, U.S. authorities let it be known that they would allow the dollar to depreciate against the dissenting countries' currencies in the absence of macroeconomic stimuli.[9] Eventually, Japanese prime minister Takeo Fukuda agreed to the U.S. stimulus request in late 1977.[10] A year later at the Bonn Economic Summit in July 1978, German Chancellor Helmut Schmidt acceded to expansionary fiscal policy as a part of a package of mutual concessions.[11][12][13]

1980–1985

There was a twenty-six percent appreciation of the dollar between 1980 and 1984[14] as the result of a combination of tight monetary policy during the 1980-82 period under Federal Reserve Chairman Paul Volcker and expansionary fiscal policy associated with Ronald Reagan's administration during the 1982-84 period. The combination of these events pushed up Long-term interest rates, which in turn attracted a capital inflow and appreciated the U.S. dollar.[7] The 1981-84 Reagan administration had an explicit policy of "benign neglect" toward the foreign exchange market.[15][16] Some U.S. trade partners expressed concerns over the magnitude of the dollar's appreciation, advocating for intervention in the foreign exchange market in order to dampen such moves.[7] However, Secretary of the Treasury Donald Regan and other administration officials rejected these notions, arguing that a strong dollar was a vote of confidence in the U.S. economy.[17] At the Versailles Summit of G-7 leaders in 1982, the U.S. agreed to the requests of other member nations to allow an expert study of the effectiveness of foreign exchange interventions. The eponymous "Jurgenson Report", named after its lead researcher Phillipe Jurgenson, was submitted to the 1983 Williamsburg Summit where the requesting nations were disappointed that the findings did not support their advice.[18][19][20] Only slightly deterred, the Plaza Accords in 1985 occurred. (The Plaza Accords were an impetus for the G-7 Finance Ministers as the group of officials that had met in New York were the first officials for it.)[15][21] However, the U.S. began “talking down” the dollar further in order to encourage stimuli to domestic demand in Japan and Germany.[2]

1990s

In 1992, following a recession with a slow recovery and a delayed response in the labor markets, Bill Clinton's administration signaled the desirability of yen appreciation against the dollar: "I would like to see a stronger yen.”[22] Also, in February 1993, then-Treasury Secretary Lloyd Bentsen reiterated the position when he was asked if he'd like to see a weaker dollar.[23] These comments were to influence the USDJPY so as to protect against Japanese export-growth at the expense of the U.S. current account position.[2] Afterwards, the dollar slumped against the yen, moving the yen to the 100 level against the dollar in the 1993 summer.[24]

Inception

In response to the ailing dollar, on 25 April the G-7 Finance Ministers and Central Bank Governors released a statement from their meeting in Washington, D.C. calling for the orderly appreciation of the dollar:

“The ministers and governors expressed concerns about recent developments in exchange markets. They agreed that recent movements have gone beyond the levels justified by underlying economic conditions in the major countries. They also agreed that orderly reversal of those movements is desirable, would provide a better basis for the continued expansion of international trade and investment, and would contribute to our common objectives of sustained non-inflationary growth. They further agreed to strengthen their efforts in reducing internal and external imbalances and to continue to cooperate closely in exchange markets.”[25]

Replacing Treasury Secretary Lloyd Bentsen early in December 1994, Robert E. Rubin responded to the dollar’s depreciation with: “A strong dollar is in our national interest.”[26][27] Thus, in 1995, Rubin re-set U.S. dollar policy, stating, in paraphrase: The strong-dollar policy is a U.S. government policy based on the assumption that a strong exchange rate of the dollar is both in the U.S. national interest and in the interest of the rest of the world.[28] Rubin further emphasized that it “wouldn’t be used as a tool for trade."[29][30] In essence, the strong dollar policy was seen as a way to assure investors that Washington would not intervene in exchange markets to debase the currency,[31] a de-weaponization of the foreign exchange market, as Marc Chandler says.[32] Robert Rubin’s motivation for introducing the strong dollar policy revolved around his desire to keep U.S. bond yields low, and to avoid criticism from trade partners that America was deliberately devaluing its currency to boost exports.[33] Initially, the rhetoric helped the dollar rise by thirty percent between 1995 and 2002, but some assert that this had more to do with U.S. monetary tightening and the Dot-com bubble than any deliberate policy initiatives.[33] Nevertheless, the dollar underwent an extraordinary revival since hitting lows in April 1995, rising more than 50 percent against the yen and nearly 20 percent against the mark by 1997 — with an appreciation of 7.5 percent against the yen and 8.7 percent against the mark from 1 January 1997 to 7 February 1997.[34]

21st century

Since inception, the strong dollar policy has usually consisted as periodic statements by government officials insisting that the U.S. continues to pursue a strong dollar.[35] However, the status quo is not always adhered to. For example, during the World Economic Forum in Davos, Switzerland, Secretary of the Treasury Steven Mnuchin was quoted saying "a weak dollar is good for U.S. trade",[36] which was an impetus for a one percent drop in the U.S. Dollar Index by six days later.

See also

References
  1. Twaronite, Lisa (29 January 2008). "Strong dollar policy is useful fairy tale for U.S." Marketwatch. Retrieved 23 August 2011.
  2. Henning, C. Randall (2006). "The Exchange-Rate Weapon and Macroeconomic Conflict". In David M. Andrews (ed.). International Monetary Power. International Monetary Power. Cornell University Press. pp. 117–138. ISBN 978-0-8014-4456-2. JSTOR 10.7591/j.ctt1xx45w.11.
  3. "The Federal Reserve Bank of Chicago-Strong Dollar/Weak Dollar".
  4. "Smithsonian Agreement of the Group of Ten".
  5. Keegan, William (2004-11-21). "William Keegan: Shock as continent cut adrift by Snow". The Guardian. ISSN 0261-3077.
  6. "International Trade Negotiations". CQ Researcher by CQ Press.
  7. Frankel, Jeffrey (2016-04-07). "The Plaza Accord 30 Years Later". International Monetary Cooperation: Lessons from the Plaza Accord after Thirty Years. Peterson Institute for International Economics. ISBN 978-0-88132-712-0.
  8. Bronfenbrenner, Martin (1979). "On the Locomotive Theory in International Macroeconomics". Weltwirtschaftliches Archiv. 115 (1): 38–50. doi:10.1007/BF02696340. ISSN 0043-2636. JSTOR 40438717.
  9. Scheuerman, William (1985-08-01). "United States International Economic Policy in Action: Diversity of Decision Making. Stephen D. Cohen , Ronald I. Meltzer". The Journal of Politics. 47 (3): 1001–1004. doi:10.2307/2131223. ISSN 0022-3816. JSTOR 2131223.
  10. Rowen, Hobart (1978-09-02). "Japan Acts To Approve Stimulus". Washington Post. ISSN 0190-8286.
  11. Iida, Keisuke (2012-12-06). International Monetary Cooperation Among the United States, Japan, and Germany. Springer Science & Business Media. ISBN 978-1-4615-5143-0.
  12. Destler, I. M.; Sato, Hideo (1982). "Locomotives on different tracks, macroeconomic diplomacy, 1977-1979". Coping with U.S.-Japanese economic conflicts (2nd ed.). Lexington, Mass. : Lexington Books. pp. 243–70. ISBN 978-0-669-05144-5.
  13. Putnam, Robert D.; Henning, C. Randall (1989). "The Bonn Summit of 1978: A Case Study in Coordination". Can Nations Agree?. Issues in International Economic Cooperation (1st ed.). Brookings Institution Press. pp. 12–140. ISBN 978-0-8157-1178-0. JSTOR 10.7864/j.ctv80cd2w.5.
  14. Board of Governors of the Federal Reserve System (US) (1973-01-02). "Trade Weighted U.S. Dollar Index: Major Currencies". FRED, Federal Reserve Bank of St. Louis. Retrieved 2019-01-04.
  15. Destler, I. M.; Henning, C. Randall (1989). Dollar Politics: Exchange Rate Policymaking in the United States. Institute for International Economics. ISBN 978-0-88132-079-4.
  16. Yoichi, Funabashi (1989-03-01). Managing the Dollar: From the Plaza to the Louvre (2nd ed.). Washington, D.C: Peterson Institute for Intl. Economics. ISBN 978-0-88132-097-8.
  17. Sargen, Nicholas P. (2016-10-05). Global Shocks: An Investment Guide for Turbulent Markets. Springer. ISBN 978-3-319-41105-7.
  18. Henderson, Dale; Sampson, Stephanie (1983), Intervention in Foreign Exchange Markets: A Summary of Ten Staff Studies. (PDF), Federal Reserve
  19. Obstfeld, Maurice (December 1988). The Effectiveness of Foreign-Exchange Intervention: Recent Experience. National Bureau of Economic Research.
  20. Jurgensen, Philippe (January 1983). Report of the Working Group on Exchange Market Intervention. s.l.: s.n.
  21. III, James A. Baker; Fiffer, Steve (2008-06-02). Work Hard, Study . . . and Keep Out of Politics! (1st ed.). Evanston, Ill: Northwestern University Press. ISBN 978-0-8101-2489-9.
  22. "THOSE MARKETS AREN'T CRAZY". Washington Post. 1994-05-31. ISSN 0190-8286.
  23. Kilgore, Tomi (2010-10-28). "Stocks Shouldn't Blindly Follow Dollar's Guidance". Wall Street Journal. ISSN 0099-9660.
  24. Brown, B.; Aliber, Robert Z. (2002-05-01). The Yo-Yo Yen: and the Future of the Japanese Economy. Springer. ISBN 978-1-4039-0710-3.
  25. "UofT G8 Information Centre: G8 Finance Ministers' Meetings".
  26. "Rubin: Strong dollar in national interest". UPI. 1995-03-03.
  27. Bradsher, Keith (1995-03-04). "CURRENCY MARKETS; Intervention No Help As Dollar Sinks Again". The New York Times. ISSN 0362-4331.
  28. Buiter, Willem; Rahbari, Ebrahim (2011-06-28). "The 'strong dollar' policy of the US: Alice-in-Wonderland semantics vs. economic reality". VoxEU.org.
  29. Anstey, Chris (2018-01-24). "Mnuchin's Dollar Salvo Pales Against 1980s Currency War". Bloomberg.
  30. Baker, Andrew (2006-01-22). The Group of Seven: Finance Ministries, Central Banks and Global Financial Governance (1st ed.). London: Routledge. ISBN 978-0-415-49896-8.
  31. Wroughton, Lesley; Lange, Jason (2018-01-24). "U.S. 'strong dollar' policy in question". Reuters.
  32. Chandler, Marc (2018-12-04). "The Dollar and Its Rivals" (Marctomarket.com). Marc to Market.
  33. Davies, Gavyn (2017-04-15). "President Trump abandons the strong dollar policy". Financial Times.
  34. Blustein, Paul (1997-02-08). "Rubin Signals Shift to Curb Dollar's Rise". The Washington Post.
  35. Klein, Ezra (2011-05-23). "What Larry Summers taught Christina Romer about the dollar - The Washington Post" (.com). Washingtonpost.com.
  36. Domm, Patti (2018-01-24). "Treasury secretary could clarify comment that caused dollar to tumble". CNBC. Online.
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