Column-Yellen could face G7 pressure on dollar: McGeever

　　div classBodysc17zpet90 cdBBJodivpBy Jamie McGeeverp

　　pORLANDO, Fla. Reuters – U.S. Treasury Secretary Janet Yellen has barely made any public comment on the dollars exchange rate since she assumed office in January last year, but she may have to find her voice soon. pdivdivdiv classBodysc17zpet90 cdBBJodiv

　　pShe will meet other Group of Seven finance ministers and central bankers in Bonn this week against one of the most challenging global economic backdrops in decades, at the heart of which is the role of the seemingly omnipotent U.S. dollar. p

　　pMeasured against a basket of major currencies it is the strongest it‘s been for 20 years. Japanese officials have expressed discomfort with the yen’s weakness, and now euro zone officials are squirming at the inflationary impact of the euro also approaching a 20year trough and parity with the dollar.p

　　pBank of France governor Francois Villeroy de Galhau said this week that the European Central Bank will “carefully monitor” exchange rate developments, adding: “A euro that is too weak would go against our price stability objective.”p

　　pGRAPHIC Dollar index & euro since euro launch: https:fingfx.thomsonreuters.comgfxmktbyvrjdlmgveDXYEuro.jpgp

　　pYellen should be quite happy with a high exchange rate – it helps dampen the impact of import prices on inflation, which is running at its highest in 40 years and is now the most pressing issue for consumers, business, and policymakers alike. p

　　pTreasury has largely adhered to the policy set out in 1995 by then Treasury Secretary Robert Rubin, who declared that a strong dollar was in the U.S. national interest and the phrase became a mantra for him and his successors for many years after.p

　　pThe policy doesnt refer to specific levels, but was designed to dissuade markets from speculating about any government bias towards tradeenhancing currency weakness and help keep U.S. bond yields and inflation expectations under control into the bargain. p

　　pFormer President Donald Trump threw all that out the window as part of his broader shift towards protectionism, and often expressed support for a weaker dollar. His Treasury Secretary Steve Mnuchin also infamously welcomed a weaker dollar before being forced to row back. p

　　pYellen, of course, is from the Democratic side of the political aisle. But she has still barely raised the issue of exchange rates since replacing Mnuchin. p

　　pAt her Senate confirmation hearing she said she believed in marketdetermined exchange rates, and that targeting a weaker currency to gain commercial advantage is “unacceptable”.p

　　pShe repeated that line during a Wall Street Journalhosted webcast this month, adding that rising U.S. interest rates relative to those in the rest of the world have helped fuel the dollars rise. p

　　p“In a way, that is part of how a tighter monetary policy works,” she said, indicating that she was comfortable with the dollars appreciation up to then.p

　　pGRAPHIC Major central bank policy rates: https:fingfx.thomsonreuters.comgfxmktlgvdwekxmpoG4RATES.jpgp

　　pTWOWAY RISKp

　　pIf it‘s a simple as that, then Yellen and her fellow G7 finance chiefs may just assume that a reversal in these interest rate gaps will cool the dollar’s jets eventually. p

　　pBut some may be tempted to issue a verbal shot across the bows of any potential dollar overshoot that could unnerve global markets further.p

　　pAnalysts at Barclays and Goldman Sachs reckon the dollar is close to topping out – Goldman estimates the dollar is 18 overvalued – but they are cautious of calling for a reversal.p

　　pThe ECB‘s window to raise rates before recession hits may be smaller than the Federal Reserve’s and the Bank of Japan is still committed to an ultraloose monetary policy aimed at capping the 10year yield at 0.25.p

　　pSteven Englander, head of FX strategy at Standard Chartered and a veteran G7 watcher, notes that Japans monetary policy is entirely consistent with a weak yen, which reduces the chances of a Tokyo protest against dollar strength making it into the Bonn communique.p

　　p“Any mention would be an effort at making investors more cautious on oneway dollarbuying. Any intervention mention is a shot across the bow but they are not close to taking a real shot at intervention yet,” Englander said.p

　　pThe last time the world‘s leading industrialized economies took coordinated action to address independent dollar strength was the G5’s Plaza Accord in 1985. p

　　pGRAPHIC Dollar index since 1971: https:fingfx.thomsonreuters.comgfxmktjnvwezyjovwUSDindex.jpgp

　　pThe current mix of high U.S. inflation, a hawkish Fed, and divergent policy among the worlds top central banks has drawn parallels with the early 1980s and the runup to Plaza – even if most see any repeat as unlikely. p

　　pBut the G7 host sets the meetings agenda, and if French officials are already making noises about the euro, you can be sure Germany is way more nervous about the weak exchange rate and inflationary pressures that come with it. p

　　pJoe Lavorgna, chief economist, Americas at Natixis and former adviser to President Trump, doubts Yellen will want to address the issue if she can help it, but doesnt rule it out in the near future.p

　　p“The administration wont want a weaker dollar, certainly not at this point. A weaker dollar eases financial conditions, and the U.S. wants tighter conditions. But if you get an overshoot of the dollar through the summer and stagflation in the euro zone, the calculus could shift,” he said.p

　　pRelated columns:p

　　pTINA‘ still driving hedge funds’ bullish dollar viewp

　　pStirring ingredients of 1985s dollarcapping Plaza Accordp

　　pFed fingers crossed for 1994 rerun as hiking path shortensp

　　pFraying central bank consensus spurs dollar and market stressp

　　pThe opinions expressed here are those of the author, a columnist for Reuters.p

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　　pp By Jamie McGeever Editing by Tomasz Janowski Graphics by Saikat Chatterjee, Joice Alves, Saqib Ahmedp

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