Adam Posen Talks 'Credible' Dollar Threat

SPEAKER_1 (0:02)

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Stephen Carroll (0:07)

Let's think a little bit more about what the latest spike in oil prices means for central banks and economies more broadly. Joining us now in the London studio is Adam Posen, president of the Peterson Institute for International Economics. Adam Posen, great to have you with us on Bloomberg Radio this morning.

We're looking at another threshold being passed for oil, an indication of how markets are receiving the developments in the Middle East. But how important is $100 a barrel oil from a broader scale of things? It is more than just a psychological threshold.

Adam Posen (0:39)

Stephen, thanks for having me. I actually don't think it's that big a deal. In a sense, the more oil keeps spiking up or gas keeps spiking up, the more you start seeing changes in demand, the more you start seeing rerouting.

The scary thing about the Houthis attacking in Saudi is the Saudis had managed to start rerouting a lot of their shipments, and that's getting broken down and that has to be dealt with. But essentially, I think we're past the peak of oil impact on the major economies. It will still be hard, it will still be inflationary. But the longer this goes on, the less impact it has.

Caroline Hepker (1:19)

Okay. The other thing happening in markets is the rise in bond yields in Europe, in the US, particularly at the longer end of bond yields. Does this add, I mean, surely it adds more pressure to that?

Adam Posen (1:31)

Yes, Caroline. I do believe that. I think we've got a lot of reasons why long bonds are going up in the US and most of the G7 economies.

And it has to do with larger issuance in the face of defense spending, demographics, green outside of the US. It has to do with diminished savings flowing from China and elsewhere into Western treasuries and guilts and so on. It has to do with the political situation that we cannot see the kind of resolution putting the track partially back on the rail, the train back on the rails the way we used to see recurrently every 10 years or so in most democracies. We haven't seen that now for a while. So there are a bunch of things pushing up rates and then the US Treasury posturing about selling off US dollars to support the yen doesn't help either.

Stephen Carroll (2:29)

Well, I want to ask you a little bit more about what we heard from Scott Bessent on his interventions on markets in terms of the yen. I mean, is this a warning, do you think, from the Treasury Secretary about what he could do in the future or is it just a defense of what he's done so far?

Adam Posen (2:46)

It's a fair question. I'm not sure. I know what I do know is if he chooses to degrade the dollar, and let's be very clear, that's what we're talking about, he can do so. I mean, it's hard for the Japanese to defend the yen. It's hard to defend a currency under attack. It's always easy for a finance minister, a Treasury Secretary to weaken a currency. So it's a credible threat in that sense. It's very short-sighted because weakening the dollar isn't going to help anything.

But it's a credible threat.

Caroline Hepker (3:18)

Yeah, so a credible threat. But my main question is, why? Why do it?

Adam Posen (3:24)

I think that's entirely fair. And obviously, Scott was saying the same thing.

I think it's some weird combination of the president wants something and the cabinet snaps to attention, says, yes, sir, we'll get it done. I think it's an attempt to set things up ahead of the Xi-Trump summit so they can ask China to do some things to strengthen its currency because they're saying, well, look, the yen is moving up, the Korean won is moving up and so on. And I think it's frankly just bad judgment on the part of US Treasury and this administration that they think they're going to suit their goals by pushing down on the dollar and it's going to backfire.

Stephen Carroll (4:14)

What are the goals that we should be understanding behind all of this? Is it about boosting trade from a weaker dollar or more?

Adam Posen (4:22)

There is this school of thought that Vice President Vance has spoken of, Secretary Bessent has spoken of, people associated with the administration have spoken of that. It's kind of like some things said about the pound in the city of London, that by having the dollar be overvalued, by be a place where capital is attracted to it, distorts the economy, makes trade X in terms of net exports harder, it distorts against manufacturing.