Market Insider

How Mnuchin's comments dinged the dollar, pumped up the peso

Steve Mnuchin
Yuri Gripas | Reuters

Treasury Secretary Steven Mnuchin didn't take sides on the controversial border-adjustment tax, but some in the currency market may have thought he did.

The dollar index moved slightly lower after Mnuchin appeared on CNBC's "Squawk Box," where he discussed the administration's plans for significant tax reform, economic growth, regulatory reform and dollar strength, among other topics. But he did not sound ready to call China a currency manipulator without review, and he did not sound protectionist on trade, two points that helped lift emerging market currencies.

"He didn't rule out the border-adjusted tax," said Dan Katzive, head of North American foreign exchange strategy at BNP Paribas. "If you thought it was a done deal, you might have been disappointed." Companies have lined up on both sides of the border-adjustment tax, being proposed as part of the House tax plan and expected to drive up the dollar sharply if it becomes law.

Alan Ruskin, head of G-10 currency strategy at Deutsche Bank, said the lack of endorsement for the border-adjusted tax was just one reason the dollar slipped back. The border-adjustment tax would tax all goods coming into the U.S. but not exports.

"I think the market was a little bit disappointed about a few things. ... He said nothing about the strong dollar story, nothing clear or clean on border-adjusted taxes and probably in some ways, the most way, was when he was talking about three percent growth, he was pushing it back to 2018," said Ruskin.

Mnuchin seemed to indicate a long lag on fiscal policy and its affect on growth, Ruskin said. That's important since stronger growth from stimulus and taxes is "the cornerstone of the strong dollar story, and as far as accelerating the Fed hiking," Ruskin said.

The dollar index was as low as 100.87 after the Mnuchin interview, from 101.27 before the interview. It was at 100.93 at midday.

"I think maybe people were expecting something more dollar positive from Mnuchin," said Ruskin. "The tone was conciliatory as it related to China, particularly the trade issue. He didn't really push it."

That helped the peso and other emerging market currencies moved higher, with the peso up more than 1 percent against the greenback.

Mnuchin didn't push the strong dollar policy that had been the stated policy of past administrations, but he did say the strong dollar reflected confidence in President Donald Trump's policies.

"He talks about how the dollar has appreciated since Trump got elected," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "There's a little problem with his understanding of a strong dollar policy. It's not about the level. It's about telling your trade partners that we will not use the dollar as weapon."

"By linking Trump to it, it's a little bit self-serving. It's also dangerous. What happens if the dollar falls?" Chandler said, but he added the comments did eliminate some fear that the U.S. would start a currency war by talking it down. "But his understanding is not sufficiently robust to ease concerns that the U.S. may still use the dollar as a weapon." Trump has said that he would like a weaker dollar.

As for the border-adjustment tax, the administration has yet to signal whether it would support the plan or not, and Mnuchin did not make that clear either.

"We think there's some interesting aspects. We think there's some concerns about it. I think one of the things, you know, we are all committed to do is make sure there is a combined plan that's a plan that is the administration's plan with the support of the House and the Senate ... that we are all working together on one plan that gets passed," Mnuchin said.

The administration has not made its views clear on that aspect of the tax plan, and traders have been hoping President Donald Trump will provide some clarity when he speaks to Congress on Tuesday.

Proponents say it would allow Congress to cut the corporate tax rate to 20 percent from 35 percent since it would provide $1 trillion in revenues to offset the tax cut. It also relies on a 25 percent jump in the dollar, which would prevent the plan from being inflationary for U.S. consumers.

It is opposed as potentially inflationary by retailers and other companies dependent on imports, but it is supported by big industrial companies like GE and Boeing.