An Urban's Rural View

Talking Down the Dollar

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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The dollar is falling and the Secretary of the Treasury says that's good for trade. Farmers and ranchers should be cheering him on -- right?

After all, a weaker dollar makes U.S. grain and meat more attractive to buyers overseas. With the big crops we've produced and the big inventories we've piled into the bins, we need all the export demand we can get.

Unfortunately, a weakening dollar is not an unalloyed blessing for agriculture. For in addition to propping up exports, a drooping dollar props up interest rates. It does that by discouraging foreign investment in U.S. Treasuries. That's because as the dollar loses value, foreigners' U.S. dollar interest income is worth less when they repatriate back into foreign currencies.

The interest-rate picture is more complicated than that, to be sure; other factors play a role in rates' rise and fall. Still, it's no surprise that as the dollar has plunged in recent months, the yield on the 10-year Treasury note has climbed.

With that in mind, let's go back to Treasury Secretary Steven Mnuchin and what the markets saw as his attempt to "talk down" the dollar. Should farmers be cheering him on?

In fairness, he claims he was quoted out of context -- and he was. Assuming he's telling the truth that he wasn't trying to talk the dollar down, it was a rookie mistake on his part not to realize that the markets wouldn't care about context. He should have known that the markets will always focus on the part of any statement where a treasury secretary says "a weaker dollar is good for us as it relates to trade."

That's especially true now because previous treasury secretaries thought it wise to say they wanted a strong dollar even when they really didn't. It's doubly true coming from a treasury secretary who works for a president who is obsessed with trade deficits and has complained that "our dollar is getting too strong" (http://tiny.cc/…).

For the record, here's Mnuchin in context: "The dollar is one of the most liquid markets. Where it is in the short term is not a concern of ours at all. Obviously a weaker dollar is good for us as it relates to trade and opportunities. But again, longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency, in terms of the reserve currency."

That statement sent the dollar plunging, as Mnuchin should have known it would. It recovered only after the head of the European Central Bank dissented and President Trump contradicted Mnuchin. "The dollar is going to get stronger and stronger," the president said, "and ultimately I want to see a strong dollar" (http://cnb.cx/…).

There is one other reason Mnuchin's remark had the momentary effect it did. He was pushing on an open door. The dollar was headed south anyway, having fallen more than 11% in the last year and more than 3% in the last month (http://on.mktw.net/…).

Why, when the American economy is growing, our stock market rising and our central bank raising interest rates, should the dollar be falling? Because the rest of the world is also growing, overseas stock markets are performing even better than ours and foreign central banks are poised to raise rates. The dollar strengthened in the latter years of the Obama administration because America looked like a better place to invest than the rest of the world. In 2017, the rest of the world caught up.

Mnuchin insists his comment about a weaker dollar being good for trade was simply a statement of fact. And a statement of fact it is; a devalued dollar will indeed be good for ag exports. What the secretary didn't mention is that it will also tend to push interest rates higher. It's impossible to calculate how much the increase in borrowing costs will offset ag producers' trade gains. There are just too many imponderables.

Cheer Steven Mnuchin on if you wish, then. But keep in mind that it's the fundamentals that are driving the dollar down, and that its fall has implications for more than just trade. That's the context that matters for farmers and ranchers.

Urban Lehner can be reached at urbanize@gmail.com

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