Is a weak US dollar a good thing?

During the Q-and-A session of a presentation I recently made, I got the following question: Did U.S. Treasury Secretary Mnuchin really mean it when he said a weak dollar was good for the U.S. economy? Since the powers that be have preached the exact opposite for as long as anyone can remember, the asker’s confusion was quite understandable. How is it now a weak dollar is good?

The truth is simple: Sometimes it is and sometimes it isn’t. It all depends on what you mean by weak and the cause of the weakness itself.

A short-term mild decrease in the U.S. dollar due to improved global economic conditions is one thing. In fact, it might actually be a good thing, as it makes our exports to foreign markets that much less expensive. Conversely, it makes imports more expensive for the American consumer. This fosters domestic production, which can be a key element in wealth creation.

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Further, a weak U.S. dollar is great for our large, multi-national corporations who generate a lot of their profits in other markets. It enables them to translate their local currency profits, hopefully, back into more dollars for reporting purposes. That could be good for earnings, which should be good for the stock price. Obviously, that makes investors happy, and anyone that has a 401K is an investor. Here is a little secret: dollar weakness was a pretty big reason for last year’s surprisingly strong rally.

However, as you can imagine, this type of currency weakness is normally pretty temporary, and that is okay. A slightly stronger dollar has its advantages as well. In fact, some measure of currency fluctuation is completely normal and arguably healthy.

The problem is when a currency collapses due to systemic failure in a country, whether economic, societal, governmental or some combination, which it usually is.

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It should be obvious Mnuchin was not advocating a complete breakdown in the dollar. He wasn’t suggesting an embattled currency is good for economic growth. That would have been a stupid thing to think and say, and Steven Mnuchin is about as far from stupid as you can get. To that end, his resume is the pipedream of most Ivy League finance and economics majors. Finally, estimates are he has around 300 million of the things, dollars that is. So, why would he want them to be weak to the point of worthless?

You see, unlike most political types, he understands the way the business world actually works. But that doesn’t mean there isn’t a legion of folks taking Mnuchin to task for his comments. After all, we have been conditioned to believe a strong dollar is necessary for economic growth. You know, it kind of makes you wonder whether there is some sort of weird machismo kind of thing going on with that.

Where the rubber meets the road, a systemically weak currency isn’t good any economy, and is usually a reflection of larger problems. Further, an artificially strong one can be just as bad, as we have perhaps found out over the last couple of decades with a ballooning trade deficit and shrinking manufacturing sector.

However, in a free, dynamic economy with a fully convertible, floating currency, weakness and strength are usually relatively short-term phenomenon, both with advantages and disadvantages. Basically, currency strength tends to smooth out over time, making a weak dollar as transitory as Mnuchin’s comments about it being good for economic growth.

John Norris is a managing director and the head of wealth management at Oakworth Capital Bank in Birmingham.