"A weaker Dollar is good for trade." That is something that economists and market participants know.
But it's not something that you usually hear coming out of the mouth of the U.S. Treasury Secretary. In fact, the Treasury Secretary for decades has repeated some version of the phrase: "A strong Dollar is in the best interests of the United States."
Hearing this morning's comments from Treasury Secretary Steven Mnuchin completely shook up the market - and added gasoline to a year-long explosive move lower in the U.S. Dollar. Here's why.
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The Old "Strong Dollar" Policy
Jawboning matters. Comments from prominent economic and policy officials matter. And the fact that Secretary Mnuchin would depart from the policy that has been in place for more than 20 years is significant.
The strong Dollar policy was designed to encourage investment in the U.S., including investment in U.S. Treasuries. Think about it this way - if the U.S. Dollar weakens, that erodes the value of investments in the United States from overseas. Investment returns are relative - so if you invest in U.S. Treasuries yielding less than 3% and the Dollar weakens by more than 3%, you have a net 0% gain.
Conversely, if you invest in the U.S. yielding 3% and the Dollar strengthens by 3%, you've just doubled your non-Dollar returns. The strong Dollar policy was good for overseas investors.
The New "America First" Policy
When he took office in 2017, President Donald Trump put forth a new, America first policy. He put trading partners - rightly and wrongly - on notice. But his Treasury Secretary never deviated from the "strong Dollar" policy.
So, how significant was this move? When posed that question, Yra Harris, a 40-year trading legend, answered in one word: "Extremely." That's because today's comments did not come willy nilly. It was not a slip of the tongue. They were calculated and, at least potentially, part of a new push to weaken the U.S. Dollar.
That could mean that 2017's move lower was only a start. EUR/USD looks certain to push towards 1.25, while GBP/USD is at its highest point since Brexit.