Do you agree or disagree and why. Do you have questions based on the postings? Use references from the readings or other articles to support your position. Be sure to properly cite your references.

QUESTIONS: 2. What are the factors, according to macroeconomic theory, that should have caused the U.S. dollar to rise in value since late 2016?

3. What are two potential counteracting reasons that have led the U.S. dollar to depreciate in recent months?

Use this reading:

1.

Dollar Hits New Low After Mnuchin Says Weakness Aids Trade; Some market participants say an end to the dollar's drop may not be imminent

The Trump administration signaled that it preferred a weaker U.S. dollar Wednesday, setting off reverberations in markets from New York City to Sao Paulo to Tokyo.

Past U.S. administrations have typically tiptoed around the subject of a weaker dollar, fearful that explicit views might affect interest rates or scramble cross-border commerce. Treasury Secretary Steven Mnuchin was more overt at the World Economic Forum in Davos, Switzerland, where he stated that a "weaker dollar is good for trade." Coupled with new tariffs and harsher administration talk about trade pacts, the remarks appeared to crystallize the market's reckoning with President Donald Trump's "America First" agenda.

Mr. Mnuchin's words quickly pushed the currency to its lowest level in three years and spurred the market to assess what next steps the Trump administration would take to lower the country's $500 billion trade deficit, a long-stated policy goal.

A weaker dollar makes U.S. goods cheaper to foreign markets, and can especially be seen as a boost for multinationals that derive a large portion of their income from outside the country. The risk of a weaker dollar is that it could undermine confidence in a wide swath of U.S. assets, including the U.S. Treasury market.

The country's new tax law will expand the federal budget deficit to as much as $1 trillion by fiscal 2019, which will need to be financed with debt sold to many foreign investors. If those investors demand higher rates to compensate for the risks of a weaker currency, that could in turn push higher costs to U.S. taxpayers.

"All eyes will be on President Trump in Davos to see if he can quell this anti-dollar sentiment, or if he fuels the flames," said analysts at High Frequency Economics in a research note Wednesday.

Shortly after Mr. Mnuchin's remarks, the prices for metals and emerging-market assets rallied, as did currencies from the Japanese yen and euro to the Brazilian real. The dollar also lost 1.67% versus the pound, its largest one- day percentage decline against the British currency since April 2017. The strengthening dollar also halted the rally in European and Japanese stocks, whose companies may be less competitive with U.S. firms selling cheaper goods.

"They've departed from a traditional dollar policy where the Treasury Department would usually avoid commenting on the currency's value," said Viraj Patel, foreign exchange strategist at ING Bank. "They see an interest in terms of their America First policy in seeing a weaker dollar."

In a press briefing later Wednesday, White House press secretary Sarah Sanders described the dollar as "very stable" while reiterating that the administration believes currencies should float freely.

Government sensitivity to any comments that could upset the U.S. currency's value goes back to the mid-1990s, when a dollar slump led to a coordinated effort by global central banks to buy dollars in a bid to support the currency.

Then-U.S. Treasury Secretary Robert Rubin, a former currency trader himself, also sought to shore up the dollar by repeatedly saying that a strong dollar was "in our national interest."

The strong-dollar mantra helped quell fears among foreign investors who worried the currency's relentless rout would eat into their returns when translated back into their home currency, analysts said.

Mr. Rubin's attempts to talk up the dollar didn't immediately rescue the currency, which foundered for much of 1995 before rallying the next year. But the "strong dollar" mentality stuck. Every U.S. administration since then had publicly espoused it until Mr. Trump's election.

The Trump administration's stance and trade issues aren't the only reasons the dollar has been reeling. The decline is partly driven by a growing belief that major central banks will shift away from their ultra-easy monetary policies in 2018.

While analysts expect the U.S. Federal Reserve to raise interest rates this year, the change in outlook for its global peers has become a more powerful force in currency markets. Some central banks, like the Bank of Canada and Bank of England, have started raising rates. That's giving investors more options as they seek higher returns on their investments.

"It's no longer only the U.S. raising by itself," said Kisoo Park, a global bond manager at Manulife Asset Management in Hong Kong.

The market has become so convinced that central banks will tighten policy in 2018 that policy makers' more- cautious words are often ignored. The yen strengthened against the dollar Wednesday, even after Bank of Japan Gov. Haruhiko Kuroda took pains a day earlier to clamp down on speculation that the bank would lift rates this year.

Some are now questioning just how quickly they will tighten and are looking for some additional clarity when the European Central Bank meets on Thursday.

Even more curious to some currency analysts, the dollar's decline has occurred despite a surge in U.S. Treasury yields --the benchmark 10-year Treasury yield this week hit 2.663%, the highest since April 2014, though it recently pulled back to 2.658%.

That is an unusual trend. Higher U.S. government bond yields typically make the dollar more appealing to investors, especially as global interest rates remain low. And yet, the dollar index is on track for its worst monthly performance since July.

"I've been watching FX for 10 years, and it's never happened before on this scale," said Gareth Berry, a foreign exchange and rates strategist at Macquarie Bank in Singapore, pointing to the divergence between Treasury yields and the dollar.

Others are eyeing the widening budget deficit--and the potential that it could widen even further because of recent tax cuts--and worrying about the rising cost of funding such a gap as interest rates move higher. Any undermining of confidence in the ability of the U.S. to pay its debts--however slight--could add to the pressure.

But many agreed that Mr. Mnuchin's comments intensified the dollar's declines on Wednesday.

"It may be global growth that's causing the dollar to weaken, but the administration is happy to champion the drop," said Mr. Patel at ING.

2.

Dollar-Rate Breakdown Exposes Foreign-Exchange Mystery

The U.S. currency was expected to strengthen amid rising interest rates. Instead, its down 11% since late 2016.

Stumped by a deepening slide in the dollar, analysts and investors are scouring past periods of U.S. currency weakness for clues to what might happen next.

The U.S. currency has slumped 11% since late 2016 against its main trading partners, including a 2.7% decline this year in the WSJ Dollar Index. That is surprising many on Wall Street, where dollar strength has been anticipated as a series of Federal Reserve interest-rate increases has expanded the yield premium on U.S. Treasury notes over comparable securities such as German bunds.

Distinct Downtrend

The dollar has tumbled against all major currencies after a yearslong rally.

This yield gap typically is one of the strongest determinants of dollar performance, as higher yields tend to draw capital into the higher- yielding government bonds. That frequently pushes up foreign- exchange values in a cycle that often benefits the higher-yielding currency, as was seen in the years after 2011 when the dollar sharply appreciated at a time of improving U.S. growth.

But it isnt working this time around. On Friday, the U.S. 10-year Treasury had a yield of 2.87%, compared with a yield of 0.66% on a comparative German bond. The difference, or spread, between those two yields last week reached its widest since the start of 2017, which was just after the spread hit an all-time high.

Breaking With the Past

Dollar-euro trading often correlates with the U.S.-German interest-rate gap, but that relationship has softened lately.

Whats going on? Some analysts say the dollar is still expensive relative to other currencies even following its recent decline, while others say economic growth in Europe, Japan and emerging markets appears poised for a larger pickup than in the U.S. Others point to parallels with previous periods of dollar weakness, while stressing that those comparisons are made loosely because many economic, political and market dynamics in prior periods wont apply to this one and vice versa.

Whatever the narrative, it is clear that investors expect the dollar rout to get worse. Hedge funds and other speculative investors are holding roughly $8 billion in bets

against the dollar, according to Commodity Futures Trading Commission data, and $19 billion in bets that the euro will strengthen.

People are a bit unclear about why the dollar is not benefiting from U.S. yields that have been moving up so fast, said Sireen Harajli, a foreign-exchange strategist at Mizuho Bank. I think thats because of concerns about the U.S. budget deficit.

Analysts at Capital Economics say the dollars current slide is reminiscent of the mid-2000s, when the currency fell significantly even as the Fed raised U.S. interest rates. The culprit then, and perhaps now: market expectations of increasing deficits in the U.S. government budget and the nations trade account.

Wider U.S. trade deficits have been a common thread in dollar bear markets. The dollars sharp decline in the 1970s came as the U.S. moved from a trade surplus to a deepening trade deficit, along with the collapse of the gold standard and a decadelong battle with inflation.

In the 1980s, a seven-year dollar rally again raised concerns about the U.S. trade deficit, which was distorting trade balances in Europe and Japan. The governments of the U.S., Japan, West Germany, France and the U.K. in 1985 signed the Plaza Accord in a bid to weaken the U.S. currency.

There are pluses to the dollars decline. Its strength in recent years weighed on exports by making U.S.-made goods less competitive abroad, hitting corporate profits at multinational firms. A strong dollar also can threaten emerging market economies by making their dollar debts more expensive to pay back.

Puzzling Evidence

The dollar's value often rises and falls with interest-rate di erentials, but a break in that relationship is turning attention to previous dollar downturns.

alleviating currency mismatches, said analysts at Oxford Economics in a research note.

Benn Steil, director of international economics at the New York-based Council on Foreign Relations, thinks comparisons to past dollar bear cycles are of little use because of idiosyncratic factors in each period. Though the link with interest rates has broken down lately, he still believes higher U.S. rates will become a main driver of the dollar this year.

The markets have been extremely sensitive in the past 10 to 15 years to relative interest rate differentials, he said. All else being equal, I would expect this to be a good year for the dollar.