Within hours of being sworn in, U.S. Treasury Secretary Steven Mnuchin’s counterparts from Tokyo to Berlin started telegraphing warnings to him: Please don’t call the yen weak. Be careful how you talk about cutting financial regulations — Europe is listening.
As President Donald Trump waited a few weeks for the U.S. Senate to confirm his Treasury secretary pick, the world watched as he and his advisers talked down the dollar and called out China and Japan for gaming foreign-exchange markets.
With Mnuchin finally installed, Group of 20 finance chiefs will be looking for clues on whether he will clarify the U.S.’s currency policy, a job that traditionally belongs to the Treasury secretary, or if he no longer believes in promises made during the Obama administration to refrain from competitive devaluations.
“The bottom line is whether this is seen as urgent and highly problematic for the rest of the world — specifically if the administration continues to publicly work through what the strategy for managing the dollar is going to be,” said Nathan Sheets, who was undersecretary for international affairs at the Treasury during the Obama administration.
If comments from the Trump administration start to cause market volatility, G-20 members may escalate their rhetoric, he said. Sheets helped negotiate the renewed G-20 pledge in 2015 that was designed to ensure nations avoid getting drawn into currency battles.
Finance ministers may take the opportunity to, with a light touch during congratulatory calls, remind Mnuchin of those commitments. As Treasury secretary, Mnuchin has so far spoken to the U.K.’s Philip Hammond, Japan’s Taro Aso and Wolfgang Schaeuble from Germany.
Trump’s economic agenda includes revamping trade policies, which may be at odds with a strong dollar. Rather than endorsing the traditional strong-dollar policy of the past two decades, the administration has offered a less consistent position on the currency. It has also singled out top trading partners, and, almost in tandem, moved swiftly to withdraw from one major trade deal and overhaul a second.
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“These are negotiating tactics — they are trying to send a signal that they don’t want to see the dollar appreciate too much,” said Domenico Lombardi, a former official on the International Monetary Fund’s board. “We know that with the Fed raising rates, we’re going to have a stronger dollar. This is going to undermine Trump’s efforts” to keep a pledge to double the U.S. economy’s growth pace to 4 percent, he said.
So far, Mnuchin has shown signs of taking a more measured approach than Trump and his advisers. He has kept a low profile, not granting any interviews except on the day his nomination was announced. That hasn’t stopped him from moving markets, including a brief sell-off in the dollar after written responses to senators’ questions were published Jan. 23. What’s unclear is if those statements were intentional policy shifts or unintended gaffes.
Since being sworn in late Monday evening in Washington, he appeared for five minutes in a daily White House briefing with prepared remarks about sanctions, taking a few questions. He has tweeted just once as secretary to say he spoke with Hammond. A Treasury spokesperson didn’t respond to a request for comment.
It was Schaeuble who fired off the first distress signal. In a speech delivered in Berlin half a day after Mnuchin started, Schaeuble said he should be careful about rolling back Wall Street regulation, citing the lessons from the 2007-2008 U.S. financial crisis that spread quickly to Europe.
“I do not advocate that we talk thoughtlessly about withdrawing the regulation we have created globally as a lesson from the financial and banking crisis,” he said, directing his comments at Mnuchin. “We have a number of volatilities — not just because of geopolitical risks to global economic development — that we can’t take seriously enough.”
Europe is wary of the U.S. easing regulations, fearing it will set off a race across the globe to cut the very rules imposed to prevent a repeat of the financial crisis. Rolling back the U.S. Dodd-Frank Act would be “very worrisome,” according to European Central Bank Governor Mario Draghi.
But it was Aso, speaking in Japanese parliament this week, who referred to the currency pact.
“The G-7 and G-20 won’t accept trading intervention in foreign exchange. I got assurances that he understands this clearly,” he said, without referring to whoever assured him of Mnuchin’s views. Aso also said he wants to talk “cautiously” with Mnuchin that it is not right to call the yen strong or weak and that the “yen is still in a strong territory.”
One obvious place to hash out any currency differences is the next scheduled gathering of finance ministers and central bankers from the G-20, who are set to meet in the German spa town of Baden-Baden in mid-March.
Perhaps above all, markets and policy makers around the world are waiting for the first move from the Trump administration regarding trade with China — on which it has vowed to take a tougher stance. While Trump the candidate said he would label China a currency manipulator immediately, the president hasn’t done so in his first several weeks in office. Mnuchin has said he would apply the designation if it’s warranted.
For now, China is probably in wait-and-see mode, according to Sheets, who is a visiting fellow at the Peterson Institute for International Economics in Washington. David Malpass, a former Bear Stearns economist, is said to be Trump’s choice to replace Sheets as undersecretary of international affairs at the Treasury.
The Chinese are “thinking about how to play defense across a range of possibilities, including currency and trade policies,” Sheets said.