Trump administration's weak-dollar policy could kill the economic rally, analyst Bove says

Key Points
  • Banking analyst Dick Bove said the Trump administration's weak dollar policy would halt the economic momentum built up since the president was elected.
  • Treasury Secretary Steven Mnuchin this week said a softer greenback "is good for us.
  • While the stock market has preferred a weak currency, Bove said it ultimately would drive up borrowing costs.
Mnuchin: The dollar is not a concern of mine

The weak U.S. dollar policy as advocated this week by Treasury Secretary Steven Mnuchin would stop the economic boom in its tracks, noted banking analyst Dick Bove said.

Since Mnuchin made comments Wednesday indicating that the White House prefers a softer greenback, the currency has plunged. Efforts Mnuchin made Thursday to backtrack failed, with the dollar off another 0.5 percent or so against its global competitors in morning trade.

That comes along with a 14 percent or so decline since President Donald Trump took office in early 2017. Trump himself is on record as preferring the weakness as it gives exporters an edge on the global trading stage.

Though the stock market has enjoyed the declining dollar, Bove said the policy over the long term is misguided.

"Foreigners will not fund U.S. debt if the policy of the United States is to degrade the stability of the dollar," Bove, of the Vertical Group, said in a report. "The United States depends on the dollar being regarded as the world's reserve currency."

Bove has been warning for years about the dollar losing its reserve status, which essentially means it is held by global governments and central banks as a safe store of value. The standing also means it can be used universally to pay off debts and trade in commodities.

Continuing to degrade the currency would put the reserve status at risk, Bove said. Should that happen, foreign governments would demand higher yields to hold U.S. debt, which in turn would boost borrowing rates and throttle the administration's hopes for a continued economic recovery and at least 3 percent growth.

Dick Bove
Jin Lee | Bloomberg | Getty Images

"If the dollar were to weaken, the [Chinese] yuan would begin to replace it as the world's reserve currency," Bove said. "Goodbye recovery ... higher taxes, higher interest rates."

Indeed, the U.S. finds itself in a ticklish position because of its burgeoning debt.

The national debt has hit $20.5 trillion — up 2.7 percent since Trump took office — of which $14.8 trillion is owed by the public. Foreign governments, led by China and Japan, hold $6.34 trillion, or 42.8 percent, of the total public debt. Foreign holdings have increased by 7.6 percent over the past year, according to Treasury data through November.

So keeping the buyers of Treasury debt happy would seem to be in the best interests of the U.S., though bond auctions remain strong even amid the weakening dollar.

Administration officials, though, have become increasingly concerned with the trade deficit, which jumped to $50.5 billion in November, according to the Commerce Department.

"Does this guy have any idea what he is risking? There needs to be better ways to reduce the trade deficit," Bove said. "This is a highly complex issue. Messing with the value of the dollar is simply not an option."

Mnuchin spent Thursday seeking to clarify his remarks the day before that "a weaker dollar is good for us as it relates to trade and opportunities." The comment was made at the World Economic Forum in Davos, Switzerland, as reported by Bloomberg.

He also said, "Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," and it was that portion of his remarks he chose to focus on Thursday

During a CNBC-moderated panel in Davos, Mnuchin said that dollar weakness in the short term was "not a concern of mine," before adding, "In the longer term, we fundamentally believe in the strength of the dollar." He later added, during an interview with Fox Business Network, that his comments were misrepresented by the media.

The dollar index, which measures the greenback against a basket of its global peers, slumped by nearly 1 percent at one point before paring losses later in Thursday trading.

WATCH: Mnuchin, in Davos, offers views on trade.

US Treasury Secretary Mnuchin: Want ‘reciprocal and fair’ trade