“It’s our currency but it’s your problem,” John Connally, Treasury Secretary under President Nixon, famously declared about the dollar at a meeting of the Group of 10 after the U.S. a few months severed the greenback’s last remaining tie to gold in August 1971.
In an unintentional bit of symmetry, President Obama Monday denied that he told the Group of Seven meeting behind closed doors that the strong dollar had become a problem. “Don’t believe unnamed quotes,” he said when queried at a news conference about a Bloomberg report citing a French official claiming knowledge of the G7 discussions at the confab in Germany.
“I make a practice of not commenting on the fluctuations of the dollar or any other currency,” Obama added. This may be a case of what’s not said also being important.
For going on two decades, the official policy on the dollar has been what was enunciated by President Clinton’s second Treasury Secretary, Robert Rubin: that “a strong dollar is in the interest of the United States.” That marked a reversal of his predecessor, Lloyd Bentsen (a Texan like Connally), who took the tack of the Carter Administration, which encouraged a weak dollar to spur the economy.
Based on the U.S. Dollar index ( DXY ), the greenback gained about 50% from its low early in the Clinton Administration until the peak at the end of the second as the “strong dollar” mantra was repeated throughout its steady ascent.
As in the Eddie Murphy movie of a few years earlier, global capital was coming to America. The U.S. economy was enjoying the benefits of the first tech boom while low inflation let the Federal Reserve keep interest rates subdued, which drew money from all points of the compass. The strong dollar was associated with falling inflation and unemployment -- the opposite of the stagflation of the Carter years.
In this century, however, the strong dollar mantra has been repeated with less and less feeling. The dollar index fell steadily through George W. Bush’s first term, then rebounded somewhat during the housing bubble in the middle of the last decade but plunged as the financial crisis approached.
After an initial flight to the greenback in 2009, the dollar index slumped, rallied, fell again and most recently has been on the upswing. The latter fluctuations have been largely tied to Fed policy, with the dollar sliding during quantitative easing and gaining as QE ended last year. In addition, the Bank of Japan and more recently the European Central Bank have been engaged in their own QE operations, which have helped to drive down the euro and the yen.
The definition of a “strong dollar” also has evolved in recent years. What most people would understand as its definition of a strong currency -- one with robust purchasing power globally -- a strong dollar in recent years has been deemed by the Obama Administration to be one that is accepted universally as a medium of exchange and a store of value.
Obama’s denial that he complained about a too-strong greenback hardly seemed a full-throated reiteration of a strong dollar policy on the part of his administration. Meanwhile, Corporate America continually cites currency issues as among prominent factors causing revenues and earnings to fall short of projections.
The dollar’s rally has sputtered since early March when the DXY briefly kissed the 100 line on the charts before backing off suddenly to the 93 level. More recently, the dollar index has recovered to around 95, mainly on the sharp weakening of the yen. That’s still up nearly 20% from a year earlier.
And against weak emerging-market currencies, the greenback is up even more.
That puts a crimp on earnings from overseas revenues, which account for nearly half of the sales for Standard & Poor’s 500 companies. Even purely domestic businesses can face margin pressures from foreign competitors who have can undercut them because of a cheap currency.
Not surprisingly, then, the dollar’s rally has lost steam as most economic numbers (except the jobs data) have fallen short of expectations. After the first-quarter weather-hampered gross domestic product 0.7% annual rate of decline, the Atlanta Fed’s GDPNow tracking model only indicates a 1.1% yearly pace for the current quarter. And that represents an upward revision from the previous 0.8%, mainly because of a drop in April’s trade deficit as the backlog of imports from dock strikes got cleared up -- not exactly a sign of a boom.
Apart from the hordes of American tourists heading abroad for their summer holidays, there is little enthusiasm for a strong dollar. If the Fed fulfills the conventional wisdom, it could move its fed funds target off the near-zero percent floor in September but the trajectory from there is uncertain, which may put a cap on the greenback.
From Obama’s body language in the denial of his supposed complaints about a strong dollar, that would seem okay by him.