America gets ready for big changes. Today, Joe Biden will be sworn in as the new President of the United States. Later in the trading day, he will hold his first speech as the new President, but traders and investors already know that the transition team behind Biden already made some crucial changes.
One of them is to nominate Janet Yellen, the former Fed Chair, as the new head of the U.S. Treasury. She replaced Steven Mnuchin that led the Treasury during the Trump administration and was responsible for big changes in the dollar’s policy.
What is the U.S. Treasury and Why It Matters for Currency Traders?
As the name suggests, the Treasury deals with the U.S. government finances. It issues debt, among other things, and manages the government accounts, the public debt, and so on.
The U.S. Treasury’s policy has a crucial role in the value of the dollar. For example, by issuing a record amount of debt last year, the U.S. Treasury account reached colossal amounts. However, if those dollars are not deployed into the economy, the effect will be a higher dollar because foreigners are net buyers of U.S. debt and need U.S. dollars to purchase it. If the Treasury releases the funds in the economy on funding various projects, it will offset the process. Naturally, by the time the U.S. pays back its debt, it needs other dollars – either new or old ones.
What to Expect From Yellen?
Yellen agrees with Biden on the need for more fiscal stimulus, despite expressing concerns regarding the rising level of debt. Should Yellen win confirmation from the Senate as the new U.S. Treasury Secretary, she will likely step away from many of Mnuchin’s decisions.
For currency traders, the most important one refers to how the Treasury views the dollar. Yellen is willing to let the market forces set the value of the dollar without interventions from the policymakers. This is not surprising coming from Yellen, as she adopted similar policies during her time acting as the Fed’s Chair.
By appointing Yellen, who successfully led the Fed, Biden’s administration sends a strong signal to financial markets. After all, with Yellen at the helm of the Fed, the United States enjoyed one of the longest economic expansions in the history of the United States – something that other countries failed to achieve in the same period.