Janet Yellen, the former Fed chair known as the “queen of doves”, will be Mr Biden’s Treasury secretary. The dollar’s plunge this year has been triggered by a new Bloomberg report that Yellen has been urged to change the tone in the Trump era in favor of a strong dollar policy.
Former Federal Reserve chair Janet Yellen has trumpeted the benefits of a weaker dollar for exports, but as incoming Treasury secretary she is under pressure to return the United States to a “strong dollar” policy that could cause turmoil on Wall Street if she does not.
The dollar’s decline this year has raised concerns among policy makers because of the competitive advantage it gives the US, and it is heading for its second steepest decline in the past 15 years. Even acquiescence in a weaker dollar could spark tensions with trading partners.
Ms. Yellen is Joe Biden’s nominee for Treasury secretary and, if confirmed, would take office in a month. Her predecessor branded two countries currency manipulators and 10 countries on a watch list for what she called human intervention. The reports, released on December 16, bring to an end a tumultuous period of currency commentary under Donald Trump’s presidency and have increased the focus on Ms Yellen’s policies.
In 1995, the U.S. adopted a policy of supporting a ‘strong’ dollar, ending the routine practice of asking other countries to push up their currencies.
While the Treasury secretary’s mantra did evolve from one administration to another, no administration has gone as far as Trump, who said in 2017 that the dollar was “getting too strong.”
While they have sometimes supported a strong dollar — always in the long run — Both Mr. Trump and Steven Mnuchin, the outgoing Treasury secretary, have said a weak dollar will help American exports. Mnuchin also said a “too-strong dollar” could have a short-term negative impact on the U.S. economy.
Ms Yellen herself has said she felt the same way in the past. As president of the San Francisco Fed in 2004, Ms. Yellen helped foster the view among investors that the Fed believed a weaker currency would help solve the U.S. current account deficit. A decade later, as chairman of the Federal Reserve, she continued to make that argument, arguing repeatedly that the rising dollar was a drag on U.S. exports.
A spokesman for Mr. Biden’s transition team declined to comment on Ms. Yellen or the dollar policy.
It is the Treasury secretary’s job to monitor monetary policy, and at least two former Treasury secretaries have urged Ms. Yellen to make clear that she does not favor a weaker dollar.
“It would be unwise to show a positive depreciation or indifference to the dollar,” Larry Summers, Bill Clinton’s Treasury secretary and Barack Obama’s national economic adviser, said last month.
Mr Summers stressed that the dollar’s dominance of the global financial system gave the Treasury a responsibility to manage its responsibilities carefully. Summers said it would be “prudent” for the incoming Biden to support a strong dollar, especially given biden’s plans for “expansionary policies.”
Hank Paulson, the former Treasury secretary under George W. Bush, made the same point in an opinion column in the Wall Street Journal this month.
“Interest rates are at historic lows and federal debt as a percentage of the economy is higher than at any time since the end of the second world war,” he said. “Adjusting to the steep trajectory of rising national debt is critical. Otherwise, the dollar will eventually depreciate. Washington will not be able to pay its bills.”
These are not issues to focus on during Ms Yellen’s time at the Fed. Ms. Yellen has been a Fed governor since the 1990s. Instead, she focuses on how exchange rates affect the economic outlook and their impact on monetary policymaking.
“Yellen as a Fed member can talk about the benefits of a weaker dollar for inflation and exports,” said Brad Bechtel, global head of foreign exchange at Jefferies LLC in New York. “But as Treasury secretary, the typical stance is a strong dollar policy.”
Since the 1970s, the value of the dollar has been set by the market and the impact of official comments on the currency tends to be fleeting, but they are still closely watched by overseas policymakers and investors.
The new administration’s announcement will be closely watched after Treasury’s Latest report on Mnuchin’s currency practices. For 25 years, the United States has not declared that any of its trading partners manipulate their currencies.
Mr. Mnuchin has used the label three times — naming China as a currency manipulator between August and January 2019, and Switzerland and Vietnam in Wednesday’s statement.
The SNB quickly rebuffed Mr Mnuchin’s call to reduce its intervention in the franc. Taiwan says the U.S. Treasury has failed to accurately reflect the size of its foreign-exchange purchases. Taiwan is currently on a watch list.
On this point, Ms Yellen has previously expressed a more thorough view of currency movements. In 2019, she said, “it is very difficult and dangerous to define a country when it uses its currency to gain a trade advantage.”
“She is likely to argue for a high bar between expressing and implementing an aggressive dollar policy and being cautious in accusing trading partners of currency manipulation,” Daniel Hui, global currency strategist at jpmorgan, wrote in a Dec. 14 report.
Whether aggressively restoring the US to a strong dollar policy or trying to avoid any comment, Ms Yellen is seen as bringing stability and predictability to currency markets. When she became fed chairwoman in 2014, she stressed the importance of information discipline, called on her colleagues to heed what they said about the dollar and stressed that the Treasury spoke for the U.S. government on currency issues.
“The Treasury speaks on behalf of the Us government on international economic policy and on the dollar, as agreed over a long period of time,” Ms. Yellen said at the Fed’s policy meeting in late October 2014. More than six years later, this is exactly the role she is expected to play.