US dollar intervention

The long-term harm from a US dollar intervention

According to Cecchetti and Schoenholtz, there are two negative consequences from any action aimed at weakening the dollar:

• The Federal Reserve would be compelled to sacrifice monetary control: the daily volume in the foreign exchange market exceeds $5 trillion per day, and the dollar is one side of nearly 90 percent of transactions. To have any sustained impact, the volume of intervention would have to be unprecedented in scale and persistent. Should others retaliate, the scale would need to be even bigger. In a world of free cross-border capital flows, a fixed exchange rate and an independent monetary policy aimed at domestic stabilization are incompatible
• A U.S. shift to an exchange rate target would result in a loss of Federal Reserve independence: since the Secretary of the Treasury is in charge of foreign exchange policy, such shift would compromise the Fed’s mandated objectives of low inflation and low unemployment for the executive branch objective of reducing the value of the currency. If a war between the Treasury and the Fed were to erupt, that would undermine the attractiveness of U.S. assets and the dollar.

Just say no to exchange rate intervention
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University

Will the economy benefit from a US dollar intervention?

The U.S. dollar appreciated by 25 percent between July of 2011 and July 2019. As a result, firms that do most of their business abroad, or face intense competition from imports, have suffered, raising concerns that a strong dollar could compromise growth by harming manufacturing. But the data doesn’t show any consistent relationship between dollar strength and manufacturing employment. As seen on the graph below, over the period 2001-09, which saw the steepest historical fall in manufacturing employment, the dollar weakened on average.

Should the United States Try to Weaken the Dollar?
By: Michael Klein, Maurice Obstfeld – Tufts University and University of California, Berkeley

Will a weaker dollar help manufacturing employment?

At some point, nationalist/populists need to decide how severely they are willing to distort the economy in their nostalgic quest. They’ve already turned trade policy into a vivid exercise in self harm. The next hot idea is to manage the nation’s currency to boost manufacturing and exports. But modeling in the 2018 study “Assessing the effects of exchange rate depreciation on the US economy” suggests that while depreciation appears expansionary over the short run, those effects fade and turn negative over the medium term “as personal consumption, consumer confidence, stock prices and housing starts tend to fall.”

Another decent jobs report creates a quandary for populists who want to manage the dollar
By: James Pethokoukis – American Enterprise Institute