When will the strong US dollar weaken? Ultimately, the answer is whenever the US Treasury wants.
When the US Treasury is not overly concerned with the US dollar, market forces can prevail to raise or lower the exchange rate compared with euros, Swiss francs, yen or any other currency.
Sometimes, other central banks intervene to raise or lower their currencies relative to the greenback and the US does not seem to care.
China is notorious for this.
Japan and Switzerland are other practised currency manipulators.
The last fully coordinated currency market intervention was conducted by the G-7 in March 2011 at the time of the Fukushima, Japan earthquake and tsunami that caused the collapse of a nuclear power plant and, ultimately, a crash of the Tokyo stock exchange.
The Japanese economy was weakened by the natural disaster.
A weaker yen would have helped the economy with cheaper exports and more inflation.
But insurance companies had to sell US dollar-denominated assets and buy yen in order to pay yen-denominated claims for the disaster losses. The result was a stronger yen.
The G-7 intervention, organised by then French Finance Minister Christine Lagarde, successfully sold yen and bought euros, US dollars and sterling to weaken the yen despite insurance companies buying it.
Lagarde’s success in this intervention was instrumental in her elevation to head of the IMF shortly thereafter.
In short, except in extraordinary circumstances, the US Treasury does not directly intervene in currency markets to target US dollar exchange rates.
If such targeting is needed, the US Treasury will work with the Fed to raise interest rates or take a pause in rate hikes to affect the US dollar’s value.
High US dollar crimps US growth
All of this may be about to change.
Both President Trump and Treasury Secretary Mnuchin have publicly expressed dismay at the greenback’s persistent strength in the second half of 2018.
A strong US dollar has adverse effects relative to Trump’s economic plans.
It makes imports less expensive, which has a deflationary impact on the US domestic economy. This is at a time when both the Fed and the White House would like to see more inflation.
A strong dollar also hurts US exports from major companies such as Boeing and GE.
That hurts US competitiveness and US jobs.
Finally, a strong US dollar hurts corporate profits of US global companies because their overseas profits are translated back into fewer US dollars.
This is a headwind to US stock market performance.