When depreciation expectations meet a "strong dollar" commitment, who will become the scapegoat—Bassent or Walsh?

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The desire of U.S. President Donald Trump for interest rate cuts is clear—he wants to lower rates rapidly and substantially, and the current trend of currency depreciation seems to suit him. However, this intention stands in sharp policy tension with Treasury Secretary Bessent and Federal Reserve chair nominee Walsh’s insistence on a "strong dollar" commitment. How to strike a balance between the president’s preference for a weaker dollar and maintaining the dollar’s reserve currency status has become a dilemma facing Washington.

According to Bloomberg, Trump recently praised the dollar’s decline of about 10% over the past year (with the trade-weighted exchange rate falling to its lowest point since 2022), saying this is good for business. However, just one day after Trump’s comments, Treasury Secretary Bessent was compelled to come forward to deny that the U.S. is intervening in the exchange rate to suppress the dollar, and reiterated America’s adherence to a "strong dollar policy." Bessent tried to reconcile the president’s remarks with policy, emphasizing that the exchange rate is not the target—the key is to attract capital inflows through fundamentals such as low taxes and smarter regulation.

Walsh, who is soon to succeed Jerome Powell as Fed chair, appears to hold a similar view. Bloomberg columnist Clive Crook analyzes that such policy ambiguity makes it difficult for the market to grasp Washington’s true intentions. On the one hand, there’s the “competitive dollar” aimed at boosting exports through currency depreciation; on the other, the “strong dollar” position meant to maintain financial hegemony. How to use tariffs, foreign exchange intervention, and cooperation between the Fed and Treasury to achieve both goals carries enormous execution risk.

Although Bessent and Walsh currently maintain a delicate vagueness in their public statements to avoid clashing directly with the White House, there are fundamental differences in their priorities. Bessent focuses on orderly debt issuance and exchange rate stability, while Walsh needs to focus on controlling inflation. If economic fundamentals deteriorate—if the dollar falls out of control or inflation picks up—this surface consensus will be difficult to maintain, and the White House may need to find a "scapegoat" for the policy consequences between the two.

The “Strong Dollar” Paradox Amid Policy Fog

There is a clear disconnect between Trump’s attitude on interest and exchange rates and the public commitments of his senior economic officials. When asked about the dollar’s decline since he took office, Trump bluntly said “it’s great,” believing it promotes business activity. However, this stance forced Bessent to act swiftly in damage control, arguing that targeting a specific exchange rate is a “wrong choice”; as long as the U.S. economic fundamentals are strong, the dollar will naturally be supported by capital inflows.

Walsh, who served as a Fed governor in 2010, made it clear that the dollar’s status as the world’s reserve currency is not an “inborn right”—it must be “earned” through a strong economy and deep financial markets. This view means policymakers should not directly manipulate prices but should focus on maintaining the dollar’s status.

Devaluation and Status: A Dual-Track Strategy?

How can the U.S. drive dollar depreciation to shrink the trade deficit while also protecting the dollar’s financial hegemonic status? Stephen Miran, a former White House advisor and now acting Fed governor, has put forward a theoretical framework: use all the tools Washington possesses. This includes using punitive tariffs not only to protect domestic producers but also to deter countries considering “de-dollarization”; using foreign exchange intervention to push down the dollar; and even using tax policy (such as the so-called “retaliatory tax”) to hit capital source countries deemed unfair to the U.S.

Under such a strategy, a weak dollar helps exports, while strong defense of the dollar’s central status preserves the “key advantage” described by Walsh. But this would require some sort of new partnership between the Treasury and the Fed, using public debt management to control the currency.

A New Fed-Treasury “Accord”

According to Bloomberg, Bessent and Walsh are considering a new Fed-Treasury “accord.” Although specific details remain unclear, their visions seem to differ. Walsh prefers to shrink the Fed’s role, similar to the 1951 agreement, aiming to more clearly delineate monetary policy from fiscal policy.

However, Miran’s vision resembles more of a “merger”: If Treasury intervention leads to dollar depreciation and foreigners dumping U.S. debt, the Fed would step in to buy bonds to limit the rise in long-term interest rates (yield curve control). In theory, the Fed would remain “independent” in setting short-term rates, but its balance sheet would serve Treasury’s exchange rate and yield management objectives. The market is concerned that such coordination could be seen as the Fed straying from its core mission of fighting inflation.

Ambiguous Consensus and Potential Scapegoats

In the face of unpredictable White House statements on the dollar, rates, tariffs, and more—often made via social media—Bessent and Walsh’s best current strategy is to maintain ambiguity in their statements. This “economic policy obfuscation” has become a professional necessity.

However, their ultimate goals are not completely aligned. As Treasury Secretary, Bessent seeks moderate 10-year Treasury yields and currency stability; as central bank governor, Walsh must defend the Fed’s independence and control inflation. If the economic situation reverses—the dollar continues to fall (whether deliberately or not), sending yields surging, the stock market declines, and inflation rebounds—their priorities are sure to come into conflict.

At such a time, the White House will need someone to bear responsibility for failed economic policy, and amid the turmoil of a depreciating dollar and shaken status, either Bessent or Walsh, or even both, may find it hard to escape becoming scapegoats.

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