(commentary be sporadic for the next couple of weeks during a European business trip)

The US dollar is consolidating yesterday’s losses that were spurred speculation that the US was abandoning the more than 20-year old strong dollar policy. The meaning of that policy was clear to global investors even if it was often parodied. It was first articulated in the aftermath of a series of attempts by Republicans and Democrats to use the dollar as a cudgel to beat concessions out of its trading partners, and especially Germany and Japan. When Rubin become Treasury Secretary in 1995, he distanced himself and the Clinton Administration from such attempts. No longer would the US use the dollar in such a way. And with a limited number of exceptions, this has remained the case.  

The new US Administration is unconventional, to say the least. Many investors recognize the conflicting impulses. On one hand, the domestic agenda of tax cuts, deregulation, and infrastructure investment is seen as dollar positive. On the other hand, the desire to unwind the direct investment strategy and the international supply chains in favor of the more traditional export orientation is seen as negative for the currency, as befits mercantilism.  

At the same time, rhetoric may have a short half-life if it becomes routine and not backed by near-term policy. The Mexican peso may be a good example. The Trump Administration’s thrust weakened the peso dramatically, and yet over the past two weeks, a period which included a spat over “the wall” that led to the canceling of a meeting between the two Presidents, the peso has been the strongest currency in the world.

With German officials opposed to the ECB’s unorthodox monetary policy, and even now pressing it to reconsider, the Trump Administration will find it difficult to convincingly attribute the depreciation of the euro over the last couple of years to Berlin and Frankfurt. Ultimately, the German steel has been mixed with softer alloys in making the euro. Although Germany could not hold a referendum on EMU, it seems clear that most Germans wanted to keep the Deutsche mark. It was sacrificed as a condition for the unification of Germany. The US has long encouraged a strong, integrated Europe.