New York (CNN Business)Democratic presidential candidate Elizabeth Warren wants a cheaper US dollar to help American exports and create jobs. That's one issue she and President Donald Trump agree on.
America's currency should be managed more actively, she said in a Medium post Tuesday, in which she unveiled her plan to "create and defend American jobs."
The American economy could benefit from a weaker dollar, because it could make American-made goods cheaper, and thus more attractive on the global markets.
But Warren's plan has plenty of skeptics. It would be difficult to achieve the desired effect of growing US exports and American workers' wages. And it could erode trust in the dollar as a global mode of payments.
"The idea that a weaker dollar would be instrumental to American prosperity shows a profound misunderstanding of how the global economy works," said Marc Chandler, chief market strategist at Bannockburn Global Forex, in response to Warren's plan.
Other countries, particularly in emerging markets, could benefit from a lower greenback, suggested TD Securities' global head of FX strategy Mark McCormick. After the financial crisis, many countries incurred debt denominated in dollars. If the buck went down in value, so would their debt burdens.
But forcing the dollar lower is easier said than done. Intervening in the currency market to make American exports more competitive to create jobs at home is not something a president can do with the snap of a finger.
The strong dollar and trade
In her post, Warren said the strong dollar is hurting American exports and is the most important factor in the United States' large trade deficit. To get out of this dilemma, the United States should be "more actively managing our currency value to promote exports and domestic manufacturing," she wrote, noting other countries lower the value of their currencies to boost exports and local industries.
Warren's strategy ignores the complex nature of a global supply chain, said McCormick.
"A weaker currency really doesn't boost export growth. This idea only makes sense in a very simplistic world," said Mark McCormick.
Today, companies' supply chains are more sophisticated and integrated, allowing them to mitigate currency fluctuations while goods are shipped back and forth before reaching the consumer.
For example, parts of a car manufactured in the United States may cross the Canadian and Mexican borders multiple times, McCormick said.
And creating jobs in the United States is too tall a task for exchange rate manipulation alone to achieve. The difference between workers' wages in the United States and elsewhere in the world can be substantial. Devaluing the dollar can't overcome that gap, said McCormick.
Warren's campaign declined to comment.
Currency wars
Like Warren, Trump has also called the dollar too strong. He has described China, Russia and the European Union as currency manipulators, but the US Treasury has refrained from officially calling them out.
America has put pressure on China to stabilize its currency during its trade negotiations. That could get awkward if the United States starts manipulating its own currency.
"It is hard for us to tell China to tell their currency should be moved by market forces, and then have a serious contender for the White House who wants to devalue the dollar," said Chandler.
If the United States government unilaterally decided to devalue its currency, other countries would probably follow.
A number of currencies are also pegged to the dollar, such as the Hong Kong dollar and the currencies of Middle Eastern oil exporters like Saudi Arabia. After all, oil is traded in dollars.
"If we have a devaluationist in the White House, investors will want higher interest rates to be compensated for the higher currency risk," suggested Chandler.
Even if Warren or Trump pursued a plan to devalue the dollar, the president couldn't do much to change the currency's value on his or her own. The president would have to have the US Treasury in consultation with the independent Federal Reserve on board with the plan to execute it.
"Something that seems incredibly unlikely for any US President unless there were extreme circumstances that warranted intervention," said Brad Bechtel, managing director in foreign exchange at Jefferies.
The world's reserve currency
A unilateral move by Washington could erode the trust in the institutional foundations of the dollar as the world's foremost reserve currency. Warren's plan would involve other countries that she believes have been harmed by "currency misalignment."
The United States should consider working with other countries "to produce a currency value that's better for our workers and our industries," wrote Warren. She didn't share which countries she believed suffered from that issue or how their cooperation should work. After all, currencies trade in pairs. So a multilateral agreement to weaken the dollar, would in turn increase the value of, for example, the euro or the British pound.
That plan would be tricky, because the dollar is still king in worldwide transactions an reserves.
Countries, by way of their central banks, and international institutions hold dollars in their reserve arsenal to minimize exchange rate risk and pay for investments.
Conventional wisdom dictates that a reserve currency has to be freely floating, allowing its value to be determined by market forces and not by government policy, which could change on a whim and not in line with trading fundamentals.
To be sure, the dollar isn't the only reserve currency. The euro is one too, as is the British pound, which was the world's reserve favorite before the dollar's reign. Recently, some central banks have also indicated they would increase their reserves of the Chinese yuan, which is not a free floating currency. The yuan's value can only fluctuate in a defined range.
Manipulating the dollar could make it less appealing as a top reserve currency, which is a status the United States has enjoyed for decades. The fact that the world holds and deals in dollars, makes the greenback the most powerful currency on Earth.
