How to manipulate the US dollar

Robert Armstrong (0:06)

Pushkin.

Can we make America great again by making the US dollar weak again? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am Rob Armstrong coming to you from Unhedged World Headquarters in New York City. Joined today by Aiden Reiter, very excitingly the newest member of the Unhedged team, who started work with us three days ago, is that right?

Aiden Reiter (0:37)

Yeah, Monday.

Robert Armstrong (0:37)

Welcome Aiden.

Aiden Reiter (0:39)

Thank you.

Robert Armstrong (0:39)

How's it been so far?

Aiden Reiter (0:40)

It's been great.

Robert Armstrong (0:41)

Say something nice.

Aiden Reiter (0:43)

It's been fantastic, and I'm just happy to give listeners a tenor to match Rob's bass.

Robert Armstrong (0:48)

I wish I knew some bass part from like a Puccini opera that I could just, I am the very model of a modern major general.

Aiden Reiter (0:59)

Is that Pirates of Penzance?

Robert Armstrong (1:04)

Enough musical theater. Your first assignment just about as an Unhedged writer was handed to you by none other than the former president of the United States, Donald Trump, who said in a recent interview that he hated the strong dollar, that it was terribly unfair, that other currencies were too weak, especially the Chinese currency, and that something had to be done.

So I asked you to go off and find out what could be done.

Aiden Reiter (1:36)

Yeah, and you know, it's unclear if this would really happen. He's definitely of two minds when it comes to the strong dollar. On the one hand, he doesn't like the strong dollar. He thinks it negatively impacts the United States. On the other hand, he wants everybody to use the dollar, and that would imply the dollar gets stronger.

Robert Armstrong (1:49)

In this area, as in so many others.

Aiden Reiter (1:52)

Yes, he's definitely of a split mind, but there's people in his camp who clearly want to go down this road. Robert Lighthizer has written about this in his book, and it's kind of been kicking around since-

Robert Armstrong (2:01)

Robert Lighthizer, I should say, is a long time economic advisor to Trump's, and potentially our next Treasury Secretary should Trump win.

Aiden Reiter (2:08)

Yes, indeed. And he has been a long proponent of weakening the dollar.

Robert Armstrong (2:14)

And the idea here, very most broadly, is that with a weak dollar, it is American stuff is cheaper for the rest of the world. More foreigners buy American stuff.

The trade deficit, which Trump really hates, gets smaller.

Aiden Reiter (2:32)

Exactly, and it would allow the US to get a more competitive advantage on the international trade market over China, which he in 2019 accused of currency manipulation.

Robert Armstrong (2:42)

Okay, let's assume that there is a second Trump administration and that administration actually means to go through with weakening the American dollar. What are their options?

Aiden Reiter (2:54)

So there's essentially four options on the table. The first is to actually go in and intervene in the international currency market. The second would be either coercing other countries or coordinating with them to weaken the dollar.

Third would just be to spook the market and hope they don't call your bluff. And finally, and probably the most draconian, is to place a tax or some other levy on foreigners holding US assets or dollars.

Robert Armstrong (3:19)

Okay, let's walk through the different options one by one. Door number one, intervening in the market. How does that work?

Aiden Reiter (3:28)

Essentially, the United States has a certain amount of money it can use to go intervene in the market and flood it with dollars, which would weaken the value of the dollar.

So there is the Exchange Stabilization Fund, which is under the control of the US Treasury Secretary. So he can use that. It's currently a mixed bag of foreign assets and US Treasuries that they can use to go intervene in the market.

Robert Armstrong (3:51)

Is this any different from what Japan does to control its interest rate?

Aiden Reiter (3:57)

So it's somewhat different from what Japan does to control its interest rate. But it's the same as what Japan has done to intervene in the value of the yen. So the Ministry of Finance, because of how Japan has controlled its interest rate, they have a lot, a lot of yen that they're just sitting on. So what they have done is they've gone into the market to try to strengthen the yen.

But because the interest rate fundamentals are such that it's so much cheaper to borrow in the yen, essentially every time they go intervene in the market, it's like burning currency.