Does Mnuchin Know? The Dollar Is Weak Already

Investors were bidding up the euro during Trump's first year. European and Asian stocks outperformed U.S. markets, too.

In dozens of tweets, President Donald Trump has pressed his claim that his initial year in the White House has been great for the U.S. and its publicly traded companies. Indeed, U.S. stock markets have boomed.

But the currency markets are sending a different signal, producing the most depreciated dollar in 15 years. In contrast to Trump's pledge to make "America first," the U.S. was actually last in investment performance and job growth among major economies in 2017 for the first time in a decade.

Not on top.
Chris Ratcliffe/Bloomberg

Protectionism isn't helping. Trump is the first president in modern times to assail multilateral trade agreements, including the North American Free Trade Agreement and the 11-nation Trans-Pacific Partnership that the administration spurned last year.

While rooting for a diminished currency and waging a war on imports, most recently by means of Treasury Secretary Steven Mnuchin's assertion on Wednesday in Davos, Switzerland, that "a weaker dollar is good for us" as he endorsed tariffs on solar cells and washing machines, Trump is eroding confidence in the U.S. and creating instability.

Lloyd Bentsen was the last Treasury Secretary to trash the dollar when he said in 1993, "I'd like to see a stronger yen." The dollar immediately plummeted. Bentsen, a politician with populist tendencies, would have been better off employing the practice developed by his successor, Robert E. Rubin, the former Goldman Sachs trader and executive who liked to proclaim, "A strong dollar is in the interest of the U.S." even when he didn't really mean it. When the dollar's appreciation was perceived to be detrimental to U.S. exports, Rubin sent an appropriate signal while preserving rhetorical consistency by saying, "We have had a strong dollar for some time now."

As Trump and his surrogates encourage investors to dump dollar-denominated assets, Europe is the biggest beneficiary. The euro gained 14.2 percent in 2017, the most among 16 major currencies and the greatest appreciation since 2003 when it strengthened 20 percent, according to data compiled by Bloomberg.

The Bloomberg Dollar Spot Index, which tracks the performance of 10 leading currencies, showed that the dollar lost 8.5 percent of its value in 2017, the worst year since the index was created in 2004. In the traditional U.S. Dollar Index, which averages the exchange rates between the dollar and six currencies, the loss was 9.9 percent and the most since 2003.

That the greenback declined more than 9 percent only eight times in the past 50 years is proof that last year was anything but normal, Bloomberg data show.

Trump likes to take credit for the 20.7 percent total return (income plus appreciation) of the S&P 500, the benchmark for U.S. stocks measured in dollars. That's a strong performance by historical standards, yet it was inferior to Germany's Dax, which gained 27.9 percent, and to the MSCI Europe Index, which rose 25.3 percent. U.S. shares were also-rans to the MSCI Asia Pacific Index, which advanced 30 percent; Japan's Nikkei 225, 23.1 percent, and Brazil's Ibovespa Index, 20.9 percent, according to data compiled by Bloomberg. The last time the S&P 500 so underwhelmed the global marketplace was 2005, when it returned 7.5 percent.

Trump's first year in the White House was no better in the bond market, where U.S. government securities, measured in dollars, produced a total return of 2.3 percent, less than half the 7.3 percent for global Treasury debt and about one-sixth the 13.7 percent from European treasuries. Asia-Pacific government bonds handed investors 5 percent. It was the first time since 2009 that the performance of U.S. debt lagged behind so many regions, according to the data compiled by Bloomberg.

As a result, investors showed a strong preference for European securities over U.S. securities last year. Investors in more than 3,000 exchange-traded funds, totaling $2.5 trillion and based in the U.S., caused inflows to the euro zone to climb to 65 percent of its market capitalization at the start of 2017, according to Bloomberg data. Asia-Pacific markets received an additional 40 percent. The $20 billion Vanguard FTSE Europe ETF, the largest U.S.-based exchange-traded fund investing in Europe, attracted $4.8 billion last year, the biggest inflow since 2013 and the second-largest annual increase since the fund was created in 2005.

"We really struggle to see who is going to be buying U.S. assets," said George Saravelos, the London-based global co-head of foreign exchange research at Deutsche Bank, in an interview with Bloomberg Television earlier this month.

Saravelos predicted that the euro will rally to $1.30 this year from $1.23, mainly because of the weakening dollar.

Last year was also the first since 2008 when Europe was a bigger job creator in the 12-month period ending Sept. 30 (the latest period for which data is available); the region's 1.6 percent increase in employment was the best 12-month performance since 2007, beating the 1.5 percent U.S. growth.

Productivity in Europe accelerated faster, too, as each employee generated 830,000 euros of revenue during the most recent quarter, up from 650,000 in 2015. In contrast, American employees brought their companies $844,000, equivalent to roughly 700,000 euros, down from almost $1 million two years ago.

"The biggest news in the global economy actually hasn't been anything about Donald Trump," the Harvard University economist Lawrence Summers, a former Treasury Secretary, told Bloomberg Television earlier this week. "It's about the resurgence of Europe, which was a long time coming but now seems to have come."

The dollar already has lost 3.2 percent in January, which is another way of saying the U.S. has been transformed from leader to laggard among investors.

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Original article

by Matthew A. Winkler

Bloomberg View

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