Yellen could face G7 pressure on the dollar: McGeever

ryanniesMay 19, 2022

Orlando — US Treasury Secretary Janet Yellen has made few public comments about the dollar exchange rate since taking office last January, but she may need to find her voice soon. Hmm.

She will meet with other Group of Seven Finance Ministers and central bankers in Bonn this week to confront one of the most difficult global economic backgrounds of decades. At its core is the seemingly omnipotent role of the US dollar.

Measured against a basket of major currencies, it is the strongest in 20 years. Japanese officials have expressed discomfort with the depreciation of the yen, and eurozone officials are now keenly aware that the effects of euro inflation are approaching the 20-year valley and are on par with the dollar. increase.

Bank of France Governor Francois Bilroy de Garhow said this week that the European Central Bank would “carefully monitor” exchange rate movements, adding that “if the euro is too weak, it will be against the price stability target.” ..

Yellen should be very pleased with the high exchange rates. This helps mitigate the impact of import prices on inflation. Inflation has peaked in 40 years and is now the most pressing issue for consumers, businesses and policy makers.

The Treasury has largely adhered to the policies set by then-Secretary of the Treasury Robert Rubin in 1995, who said the US dollar became the national interest of the United States and the phrase was for him and his successor. Declared to be a long-standing belief.

This policy doesn’t mention a specific level, but it helps to discourage markets from speculating on government bias towards a currency depreciation that promotes trade and to bargain US bond yields and inflation expectations. It was designed.

Former President Donald Trump threw them all out the window as part of his broader shift to protectionism, often expressing support for the weaker dollar. His Treasury Secretary Steven Mnuchin is also notorious for welcoming the weak dollar before being forced to row.

Of course, Yellen is from the democratic side of the political aisle. However, since replacing Mnuchin, she has yet to raise the issue of exchange rates.

At a Senate confirmation hearing, she believed in market-determined exchange rates and said it was “unacceptable” to target weaker currencies and gain commercial advantage.

She repeated the line in a webcast hosted by The Wall Street Journal this month, adding that rising US interest rates compared to other parts of the world are driving the dollar’s rise.

“In a sense, it’s part of the monetary tightening policy mechanism,” she said, showing that she was happy with the dollar’s strength.

Two-way risk

If it were that simple, Yellen and her fellow G7 chief financial officer might just assume that a reversal of these interest rate gaps would eventually cool the dollar jet.

However, some people may want to issue a shot verbally beyond the potential dollar overshoot bow that could make the global market even more disturbing.

Analysts at Barclays and Goldman Sachs believe the dollar is approaching the top – Goldman estimates that the dollar is 18% overvalued – but they demand a reversal. Be careful.

The ECB’s window to raise interest rates before a recession could be smaller than the Federal Reserve’s window, and the Bank of Japan’s ultra-loose monetary policy aimed at limiting 10-year yields to 0.25%. We continue to work on policy.

Stephen English, head of FX strategy at Standard Chartered Bank and veteran G7 watcher, said Japan’s monetary policy is in perfect agreement with the weak yen and Tokyo’s protest against the strong dollar could be a bon communiqué. It says that it is reducing.

“Both references will be an effort to make investors more cautious about buying one-way dollars. Mentioning interventions is a shot across the bow, but the actual shots with interventions. I’m not close to shooting yet, “said the Englishman.

The last time the world’s leading industrialized nations worked together to deal with the independent appreciation of the dollar was the 1985 G5 Plaza Accord.

The current combination of high inflation in the United States, the hawkish Federal Reserve, and the diverse policies of the world’s top central banks is similar to the early 1980s and preparations for the Plaza.

But if the G7 organizers set the agenda for the meeting and the French authorities have already made a fuss about the euro, we can be confident that Germany is much more nervous about the associated slump in exchange rates and inflationary pressures.

Joe Labolguna, chief economist of Natixis’s Americas and former adviser to President Trump, does not want to tackle this problem if Yellen can help it, but he will not rule it out in the near future. ..

“The administration certainly doesn’t want the dollar to weaken at this point. The weaker dollar has eased its financial position and the US wants a tougher one. But during the summer the dollar overshoot and the eurozone If stagflation occurs, the calculus can shift, “he said.

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(The opinions expressed here are those of the author, a Reuters columnist.)

(Edited by Jamie McGeever Tomasz Janowski Graphics by Saikat Chatterjee, Joyce Alves, Saqib Ahmed)