Outside the US, the passage of time combined with other central bank actions has meant the road to a weak dollar is longer and perhaps more winding than it would have been even a few months ago. In a highly indebted world, the price of delay is high and rising – something to keep in mind while financial asset prices gyrate up and down.
The decisions by the ECB and BOJ to engage in NIRP has led to the collapse in rates in Europe and Japan to the point where out to five, seven and even 10 years, government bonds have negative yields, making the 10 year UST yield at 1.75% seem mighty appealing. NIRP has also led to questions about bank profitability and hence further increased the odds of a broad, potentially global, credit crunch. There is a small ray of sunshine and that is that a broad basket of EM currencies have actually slightly appreciated versus the USD over the past month, reflecting perhaps the precarious stabilization in commodity prices.
Difficult or not, the world and the US need a weak dollar. A big part of the problem is that each central bank is doing what it thinks best for its mandate and its domestic economy. The Fed thought it was doing the right thing when it raised rates in December, while the BOJ clearly thought it was doing the correct thing when it entered NIRP after decades of avoiding such a policy. The ECB and its decision to enter NIRP likewise reflect its assessment of what Europe needs to boost inflation. With helicopter money-drops now being discussed in the Financial Times (see “Helicopter drops might not be far away,” by Martin Wolf, published in the Financial Times on February 23, 2016), it is clear the bottom of the monetary policy barrel is being reached, with subpar results and rising collateral risks. What lies beneath is more than just the title of a scary movie.
21st Century Plaza Accord Needed
When viewed in this light, it becomes clear that what is needed is a 21st Century Plaza Accord. The Plaza Accord refers to the 1985 meetings where the major economies of the day, led by the US, agreed to actively intervene in foreign exchange markets to bring down the value of the USD, which had appreciated greatly in the preceding years. The Accord was successful in sharply reducing the value of the USD, particularly against the yen. This helped to boost the US economy but also led to Japan adopting an expansionary monetary policy that helped lead to an asset bubble, the bursting of which continues to bedevil Japan to this day.
It is hard to see who would lead such a modern-day gathering, given the lame-duck nature of the Obama administration and the limited heft of others in the global economic sphere. Upcoming G20 (Finance Ministers this weekend, summit in September, hosted by China) and G7 (May, hosted by Japan) meetings may see more attention than in the recent past, but it would be big surprise indeed if something akin to a coordinated policy to weaken the dollar were to come about. It’s just about possible to envision a coordinated policy of CB easing, but beyond a bounce in global equity markets it’s hard to see what more easing will do for the global economy.
One could wish for a coordinated policy of fiscal and monetary adjustment to boost global demand and sop up some of the excess supply swamping both primary and finished products, but that seems even less likely. As noted previously, fiscal policy in the US is in the freezer till mid-2017, at least given the electoral cycle. Europe, in a way that is becoming quite depressing, has managed to throw yet another monkey wrench into its adjustment process with the Brexit discussions, which will now complicate matters through the summer at least. Japan may have some fiscal room, perhaps, for a pre-election supplementary budget but more likely a decision to hold off on the spring 2017 consumption tax, which may help Japan but is unlikely to move the global needle.