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US 'strong dollar' policy in question

[WASHINGTON] The dollar hit fresh lows on Wednesday after US Treasury Secretary Steven Mnuchin said he welcomed a weakening of the US currency, which some investors interpreted as a departure from traditional US policy.

"Obviously a weaker dollar is good for us as it related to trade and opportunities," Mr Mnuchin told the World Economic Forum in Davos a day before a speech by US President Donald Trump in the Swiss ski resort.

Mr Mnuchin added: "Longer term, the strength of the dollar is a reflection of the strength of the US economy and the fact that it is and it continues to be the primary currency in terms of the reserve currency."

IS IT A BREAK FROM POLICY?

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While some analysts argue that Mr Mnuchin's comments do not break with the US "strong dollar" policy, his remarks caused concern among investors because they come days after the Trump administration slapped steep tariffs on foreign-made washing machines and solar panels.

The remarks came as the Trump administration has warned that it is preparing a package of trade actions against China, which could spark a trade war between the world's two largest economies.

HISTORY OF 'STRONG DOLLAR' POLICY

US Treasury secretaries have been repeating that the strong dollar is in US national interests since the late 1990s, when Robert Rubin held the job in the Clinton administration.

That phrasing lost its weight and credibility when it was overused by the Bush administration, although the Obama administration tried to persuade the world that the policy was for real as it sought to borrow US$2 trillion to revive the US economy after its worst crisis in decades.

WHY DID THE UNITED STATES ADOPT THE POLICY?

The strong dollar policy was seen as a way to assure investors that Washington would not intervene in exchange markets to debase the currency.

The policy, however, has lost some of its relevance given the role of the Federal Reserve in financial markets.

The US central bank's purchases and sales of securities are major drivers in the value of the dollar and Fed policymakers say they follow foreign exchange rates closely, even though US central bankers defer to the US Treasury for comments about dollar policy.

REUTERS

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