By Mike Dolan
LONDON – Janet Yellen’s likely appointment as US Treasury Secretary is unlikely to usher in a new exchange-rate doctrine but may see more sensitivity toward the dollar’s global impact.
Assuming President-elect Joe Biden appoints the former Federal Reserve chair to be Treasury chief, as widely reported, her vast policymaking experience means few shocks are in store for markets that are already assuming she will be as much of a fiscal policy “dove” as she was a monetary one at the Fed.
But despite expected post-election congressional gridlock, investors remain wary that a combination of unprecedented fiscal and monetary stimulus, alongside a broadening recovery of the world economy and more risk-taking could weaken the dollar dramatically as twin US budget and trade deficits yawn.
Yellen’s appointment, they assume, only reinforces that picture as she’s a clear advocate of more government investment spending, keeps close attention to fragmented labour markets and inequalities and presided over easy-money policy at the Fed.
While Fed policy is often the dominant determinant of the dollar’s exchange rate, the Treasury officially holds the reins of currency policy and would, for example, be required to sanction any explicit dollar orientation one way or another or indeed any outright open market intervention to achieve the aim.
So Yellen’s dollar stance potentially packs a punch – alongside her past experience of, and future relationship with, the Fed over the broad sweep of economic policy.
That’s clearly something former Treasury Secretary Larry Summers was aware of this month in urging the new Treasury chief to avoid an “actively devaluationist or indifferent” take on the dollar, but rather deploy some oft-repeated public wording akin to the “strong dollar” mantra he and others adopted in the 1990s.
And the change is stark as it follows four years in which President Donald Trump – if not always his Treasury Secretary Steven Mnuchin – continually talked the dollar down in support of his protectionist trade policies.
Indeed, Deutsche Bank this week said it expects Yellen to largely follow the Summers recommendation – emphasising the role of a stable dollar in domestic and global financial stability.