How words can move markets

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Well, as it turned out, it was not Trump who rattled markets in Davos, but rather Treasury Secretary Steve Mnuchin. The greenback, already on a spiral lower, sank to a three-year low after Treasury Secretary Steven Mnuchin said a weaker dollar was good for US trade. Whether a weak dollar policy was the intended message or not, the fact that Mnuchin made the comments was not lost on the market. Here is the VIDEO.

The comments depart from the strong dollar policy of Treasury secretaries before him, going back to Robert Rubin in the Clinton administration. ECB’s Mario Draghi hit back and spat out these words: ‘’the exchange rate has moved due to exogenous reasons that have to do with communication. Not by the ECB, but by someone else. This someone else’s communication does not comply with the agreed terms of reference.’’ Here is the VIDEO.

Rushing in later was President Trump who told CNBC, ‘’the dollar is going to get stronger and stronger and ultimately I want to see a strong dollar’’. It was that ‘ultimately’ that spoke loudest to traders. 

Hedge fund kingpin Ray Dalio stepped into the ring and ripped Mnuchin saying the position threatens the economic recovery. In a brief LinkedIn post Thursday, the Bridgewater Associates head said a soft currency is exactly what the US does not need right now.

Dalio described a weak dollar as “a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities.” In other words, while the greenback decline might make US debt look cheaper on a relative basis, it also makes it less attractive to hold for foreign governments who are counted on to buy bonds and help keep the government running.

More specifically, Dalio said a weakened dollar would: reduce Americans’ buying buyer around the world; devalue debt and hurt foreign holders; provide paper wealth to holders of assets like stocks; increase inflation; and boost domestic activity.

“None of this is what the US economy needs now,” he wrote. “While it is described as a desirable and intended thing, it might not be a choice.”

According to the latest COT (Commitment of Traders) report released on January 26, 2018, by the CFTC (Chicago Futures Trading Commission), large speculators added short positions on the US dollar. The data were through Tuesday, January 23, before the major decline in the US dollar. 

Back to my thoughts, it seems to me the current administration is happy to let the greenback sink, at least in the short term. That way they can gain leverage in negotiating any trade deals and generally make America great again at the expense of other trade partners.

The dollar weakness will not last. In other words, the greenback will rise again as the new reality bites in the coming months and there is little the administration can do in the current environment of rising interest rates and a Federal Reserve that is keen on shrinking its balance sheet and sopping up the system’s excess liquidity.

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