Strong or Weak Dollar Good for the US? The $16 trillion Question - BBH

Analyst at Brown Brother Harriman find interested the ongoing leaks from the new US Administration and how the 'informal' power seems to be relevant against traditional structures. 

Key Quotes

"Reports suggest that recently President Trump asked National Security Adviser Michael Flynn about whether it was a strong or weak dollar that was in the US interest. According to the leaks, Flynn suggested asking an economist."  

"Many seem to be asking the same thing about the dollar, but the question is naive and misguided. It wrong assumes that the US economy, or any modern economy, is a homogeneous entity instead of diversified and complex system. In the simplest terms, it might be more helpful to recognize that there are winners and losers for different policy configurations. We already see it with the coming debate over the so-called border adjustment (tax on imports and a tax break for exports), as several large US businesses are on both sides." 

"The question assumes a static and one-dimensional view. What is strong and weak changes over time  Also it may vary over the business cycle. There are also various measurements that can be used to give a holistic view. Sometimes the dollar can be strong against emerging market currencies and weaker against other major currencies.  There are real and nominal trade-weighted measures and various equilibrium models, like purchasing power parity and real effective exchange rates. The euro may be undervalued for German producers, but it may also be overvalued for Italian or Greek, and maybe French exporters." 

"Relative business cycles may also be important. For example, the relative strength of the dollar since mid-2014 seems to be largely a function of the diverging economic and monetary performance of the US. The Federal Reserve finished its unorthodox monetary policy and was preparing the market for the beginning of a gradual normalization process. Japan and much of Europe was still in the early stages of their unorthodox efforts. That is the way the floating exchange rate should move: Strong economies with tightening monetary policy have appreciating currencies. Weak economies with easy monetary policy have weaker currencies. Typically central bankers want the broad measure of the currency to move in the direction of monetary policy." 

"The US was thought to be risking the role of the dollar in the world economy and the funding of the budget deficit. After the Maastricht Treaty, many expected that the euro would replace the dollar as the world's key reserve asset. Its current account surplus was thought to make the euro more attractive than the dollar. The strong dollar policy meant that the US would not purposely devalue the dollar to reduce its debt burden. In no way did that commit the US to a monetary policy that whose goal was the external value of the dollar however measured."   

"The capitalist rivalry was threatening the economic stability. An arms control agreement was necessary. That is what the strong dollar means. The foreign exchange could be another terrain for competition, but it would be ruinous. So foreign exchange has been de-weaponized. There is a self-policing process.  If a country strays too far, it gets pulled back, like Japan in the early days of Abe's Administration. Given some of the comments coming from the US Administration, it ought not to be surprising that both Merkel and Abe have expressed a desire to talk about the foreign exchange market with the US Administration." 

US Dollar trims gains, still near 100.00