It's nearly impossible to overstate the gravity of Mnuchin's "weak dollar" commentary today. The implications are multifarious, but the biggest impact has to do with the inflation it will spur.
In the current fiscal and monetary environment, inflation - despite its negative historical connotations - is a good thing. This is not some Weimar or Venezuela situation - it's just a step toward 2% annualized inflation, which is well below the historical average. In general, inflation is good for assets priced in Dollars, so stock and commodity prices will enjoy a tailwind. The impact on the fixed income market is far more complex because despite the aforementioned tailwind for Dollar-denominated assets, non-U.S. investors will demand higher interest rates as compensation for foreign exchange risk. Since price and yield move inversely, it's therefore likely that the 20-year bull market in Treasuries is about to come to an end. Under normal circumstances rising yields could be construed as a negative, but in this case it will help the Fed normalize our monetary policy. The Fed funds rate has averaged just under 5% over the last 100 years, so there's plenty of room overhead.
What makes Mnuchin's announcement most fascinating is the fact that it comes on the heels of Trump's first salvos in the global trade wars. Not only has he started slapping tariffs on imported goods, he's now looking to increase the purchasing power of importers of U.S. goods and services. In other words, he's putting protectionist policies in place while simultaneously greasing the wheels for our exporters. There is, of course, no free lunch, and in this case it's countries with large capital account deficits (read "China") that will end up holding the bag. Indeed, that's the entire point - Trump has always been vocal about the fact that China has taken us to the cleaners (pun intended) over the last 20 years. Make no mistake: today's weak dollar comment is all about PAYBACK.
This was a very surprising departure from our long-held "strong Dollar" policy, but at the margin it could have a materially positive effect. The risk, of course, is that food and gas prices rise too far too fast and curtail the benefits for American consumers, and it is certainly a possibility that this comes back to bite us in the ass. That's why it is so vitally important for wage inflation to keep pace with price inflation. It seems almost axiomatic that Europe and China will respond with actions intended to devalue the Euro and Yuan. If they indeed do so, we'll all be "inflating together" and this could end up doing the entire world a lot of good. Anything that pulls us further away from the event horizon of the Deflationary Black Hole of 2008 is welcome.