When devaluation expectations encounter the "strong dollar" pledge, who will become the "scapegoat" between Besent and Wosh?

President Donald Trump’s desire for rate cuts is evident; he wants to quickly and significantly lower interest rates, and the current trend of currency depreciation seems to align with his preferences. However, this intention creates a stark policy tension with Treasury Secretary Janet Yellen and Fed nominee Jerome Powell’s commitment to a “strong dollar.” Finding a balance between the president’s preference for a weaker dollar and maintaining the dollar’s status as the world’s reserve currency has become a challenging issue for Washington.

According to Bloomberg, Trump recently expressed appreciation for the dollar’s roughly 10% decline over the past year (with trade-weighted exchange rates falling to their lowest since 2022), claiming it benefits business. However, the day after Trump made these remarks, Treasury Secretary Yellen was forced to deny that the U.S. was intervening in the currency markets to weaken the dollar, reaffirming the U.S. commitment to a “strong dollar policy.” Yellen attempted to reconcile the president’s comments with policy, emphasizing that exchange rates are not a target; rather, attracting capital inflows through fundamentals like low taxes and smarter regulation is key.

Jerome Powell, who is set to succeed as Fed Chair, appears to share a similar view. Bloomberg columnist Clive Crook notes that this policy ambiguity makes it difficult for markets to discern Washington’s true intentions. On one hand, there is the goal of boosting exports through currency depreciation (“competitive dollar”); on the other, the aim of maintaining financial dominance with a “strong dollar.” Balancing these dual objectives through tariffs, exchange interventions, and coordination between the Fed and Treasury involves significant implementation risks.

Although Yellen and Powell currently maintain a delicate ambiguity in public statements to avoid direct conflict with the White House, their priorities may fundamentally diverge. Yellen focuses on orderly debt issuance and exchange rate stability, while Powell must prioritize inflation control. If economic fundamentals worsen—such as an uncontrolled dollar decline or rising inflation—this superficial consensus could break down, forcing the White House to assign blame for policy consequences.

The “Strong Dollar” Paradox Under Policy Uncertainty

Trump’s stance on interest rates and exchange rates is markedly disconnected from the public commitments of his senior economic officials. When asked about the dollar’s decline since he took office, Trump openly said “it’s great” and believed it benefits business. This position forced Yellen to quickly engage in damage control, asserting that targeting specific exchange rates is a “mistake,” and as long as U.S. fundamentals remain strong, the dollar will be supported by capital inflows.

In 2010, Powell, then a Fed governor, explicitly stated that the dollar’s status as the world’s reserve currency is not “an inherent right” but must be “earned” through a strong economy and deep financial markets. This view implies that policymakers should not directly manipulate prices but instead focus on maintaining the dollar’s global standing.

A Dual Strategy: Depreciation and Preservation of Status

How can the U.S. promote dollar depreciation to reduce trade deficits while safeguarding its financial hegemony? Stephen Miran, a former White House advisor and current acting Fed director, proposes a framework: using all available tools in Washington’s arsenal. This includes punitive tariffs not only to protect domestic producers but also to deter countries planning to “de-dollarize”; foreign exchange interventions to weaken the dollar; and even tax policies (such as “retaliatory taxes”) targeting countries believed to unfairly source capital from the U.S.

Under this approach, a weaker dollar would boost exports, while a strong defense of dollar dominance preserves what Powell calls the “key advantage.” However, this requires a new partnership between the Treasury and the Fed, leveraging public debt management to influence currency.

A New “Agreement” Between the Fed and Treasury

Bloomberg reports that Yellen and Powell are considering a new Fed-Treasury “agreement.” While details remain unclear, their visions seem to differ. Powell favors a narrower role for the Fed, similar to the 1951 accord, which aimed to clearly delineate monetary and fiscal policy.

Miran’s concept leans toward a “merger”: if Treasury interventions cause the dollar to depreciate and trigger foreign selling of U.S. debt, the Fed would step in to buy bonds to limit long-term interest rate rises (yield curve control). In theory, the Fed would still maintain independence in setting short-term rates, but its balance sheet would serve the Treasury’s goals of exchange rate and yield management. Markets worry that such coordination could be seen as the Fed deviating from its core mission of fighting inflation.

Ambiguous Consensus and Potential Scapegoats

In the face of unpredictable White House statements on the dollar, interest rates, and tariffs—often via social media—Yellen and Powell’s best strategy is to maintain a degree of ambiguity. This “economic policy obfuscation” has become a professional necessity.

However, their ultimate priorities may diverge. As Treasury Secretary, Yellen seeks moderate 10-year Treasury yields and currency stability; as Fed Chair, Powell must defend the independence of the central bank and control inflation. If the economy reverses course—such as a continued dollar decline leading to soaring yields, stock market declines, and inflation resurgence—these priorities will clash.

At that point, the White House will need someone to take responsibility for failed policies. Amid the chaos of a depreciating dollar and waning status, one or both of Yellen and Powell may find themselves scapegoated for the fallout.

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