Que the currency war: U.S. officially abandons decades long strong dollar policy

With President Trump having to walk very lightly when it comes to China over trade, it appears that outside of a few minor tariffs, The Donald is seeking the path of least resistance to try to improve the long-standing trade deficit that has plagued the U.S. ever since NAFTA was passed.

And by this we mean President Trump is going to use the dollar as his catalyst to make U.S. goods cheaper overseas.

In fact this gauntlet appears to have been thrown down this morning when Treasury Secretary Steve Mnuchin officially put to bed Washington's decades long strong dollar policy.

Treasury Secretary Steven Mnuchin said the U.S. is open for business and welcomed a weaker dollar, saying that it would benefit the country.

Speaking at a press conference at the World Economic Forum in Davos Wednesday, he made a bid for investment into the U.S., saying the government was committed to growth of 3 percent or higher.

”Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos, according to Bloomberg, adding that the currency’s short term value is “not a concern of ours at all.”

”Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

Presidents going back to Ronald Reagan have all jawboned about it being U.S. policy to support a strong dollar, and up until the Fed began to finally raise rates back in 2015, the dollar has played its part in being much stronger than most global currencies.  In fact up until recently, the dollar made mincemeat of both the Euro and the Pound Sterling, which saw each of them come closer to parity than at any time in the past several decades.

Needless to say however, it did not take much rhetoric from either President Trump or Secretary Mnuchin to send the dollar spiraling over a cliff.  Yet what it did do was slice away the very thin veneer that had held the reserve currency above 90 on the Dollar Index, leading to what should be a swift fall down into the lower 80's.

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For China this change in policy will have profound effects for their economy in the short and medium terms since they have been hesitant over the past two years to devalue their currency as it continues to get stronger and stronger.  But within the next two quarters however, the Far Eastern power will certainly have to act as it digests whether a weak dollar ends up just having moderate consequences for their exports, or whether they must react with strength in either their own currency, or in attacking the dollar's underlying authority.

In the end Donald Trump is simply following through with what he outlined he would do during his campaign, and it is inevitably the best salvo the White House can lobby at China to force a decline in the trade deficit.  But outside of the effects a weaker dollar will have on trade, the real issue will come in how it affects inflation on global commodities, since we know from recent history between 2009 and 2011 that a very weak dollar came to spark $145 oil, and record high commodity prices.