Well, they made it happen: Stephen Miran is now a member of the Fed’s Board of Governors! Since last week’s post got a little into the weeds (or over its skis) with exchange rate jargon, I thought that I’d go back a little bit and give more background on exchange rates in general. This week I’ll be talking about why exchange rates matter, how monetary policy can affect them, and why Miran wants the US dollar to depreciate. Next week I’ll dig into historic drivers of demand for the US dollar, a little about previous reports of US dollar’s demise, and why things could be different this time around. Since it’s easy to get tripped up when talking about the prices of currencies in other currencies, I’m here to walk you through it.
Exchange rates, in brief, are the price of currencies denominated in other currencies. At the precise time of writing1, the US dollar to euro exchange rate is $1 to €0.85. If the US dollar appreciated relative to the euro, you would be able to get more euros (or more of a euro) with just one US dollar. If the US dollar depreciated, you would get an even smaller share of a euro than 85%. You could also rewrite that exchange rate where you’re thinking about the price of the US dollar in terms of euros2, but I don’t recommend trying to keep both in your head at the same time. Easy way to get confused, especially if you’re the one up front teaching!
What can change those exchange rates? At the most basic level, changing demand for either currency can have an implication. If people have strong/weak demand for one country’s currency relative to the other, that can tip the price balance in either direction. The purchase of euros with dollars implies the sale of euros for dollars3. All else equal, a rush to buy more of one currency with another (all else equal) can eventually push up the price of the currency in greater demand, as people looking to change currencies will pay a higher price for it. What might prompt these changes? In an international finance textbook, they typically start with a few scenarios. Changing interest rates in one country versus another can increase profitability expectations of holding that country’s currency relative to yours, and prompt a certain yield motivated investor to rush to buy euros with dollars, or vice versa. Alternately, expectations that exchange rates may change in the future can prompt decisions to convert today – if you believe that the dollar will depreciate relative to the euro in the future, then it makes sense to buy euros today, since then in the future, you can sell those euros for more dollars.
Exchange rates matter for a few reasons. First, they affect the relative prices of goods and services from different countries. My brother in law likes Triumph motorcycles, and when the dollar appreciates against the pound, he’s usually pretty excited, because it means that imported parts to fix his bikes are comparatively cheaper – he needs fewer US dollars to purchase the same pound sterling denominated price4. You can extrapolate from this that firms in exporting industries are generally less happy when their domestic currencies appreciate, and happier when their domestic currencies depreciate relative to trading partners’ currencies. By contrast, importers and businesses that use a lot of imported inputs tend to benefit from a stronger domestic currency. If you contract with people abroad in the production of your firms goods and services, then a strong domestic currency goes farther; similarly, if you’ve ever traveled abroad while your domestic currency was relatively strong, it may have made all the stuff where you were traveling seem exceedingly reasonably priced.
Exchange rates also matter a lot if you have to pay obligations in a currency that your country does not issue. This is the so-called sovereign currency problem I hinted at in last week’s newsletter. If your country’s obligations (debts) are denominated in your domestic currency, then your government doesn’t have to worry about exchange rates when it comes to paying down those debts. But, if your debts are denominated in US dollars, and your economy doesn’t issue US dollars, that increases your economy’s exposure to exchange rate volatility when it comes to paying off those obligations. If your domestic currency depreciates relative to the currency your debt is denominated in before you have paid off your debt, you will now pay more of your domestic currency to settle that debt. This is the essence of exorbitant privilege: if your economy issues the currency in which international debts are denominated, your economy is shielded from that exchange rate vulnerability.
Exorbitant privilege also has knock-on effects for monetary policy. If the country with that privilege raises its interest rates, it is liable to lead to an appreciation of its currency relative to a host of other countries’ currencies. In our current global financial system, the US’s decision to raise interest rates tends to make dollar denominated obligations more expensive for a host of countries, regardless of how their economies were performing; in recent years, the Fed’s decision to raise interest rates in 2022 contributed to a wave of debt crises around the world.
Why does Miran want the US dollar to depreciate? If you dig into that Fortune piece about him that I linked to last week, his origin story centers on his experiences at his first job after grad school in 2010. I’ll quote directly from the piece:
“As a newly minted economics PhD from Harvard, Miran recognized that Beijing was jiggering its coin of the realm to artificially boost exports to the U.S. in a scheme that kept the dollar far overpriced, sapping the flow of American-made goods to China and fueling our exploding trade deficit versus the world’s second largest economy. ‘Watching the accumulation of Chinese currency reserves in dollars accruing from exports was absolutely eye-opening,’ recalls Miran. Witnessing those abuses also awakened him to China’s ‘non-market barriers, its different [higher than U.S.] tariff rates, the IT theft, the policies so detrimental to the U.S..’ It greatly perplexed Miran. Why, he wondered, had ‘no one seemed to care for so long?’”
But it’s important to note a few things:
1. Miran’s incredulity that no one seemed to care ignores that this assumption of Chinese currency manipulation was received wisdom at the moment. Barack Obama, who was elected two years before Miran’s revelation, had campaigned against Chinese trade practices, and “promised to ‘beef up US enforcement efforts against unfair trade practices.’” Politicians in the US have made a lot of hay out of the US dollar/renminbi exchange rate over the past few decades.
2. Smart people disagree on whether Chinese current account surpluses can really be attributed to currency policies. Paul Krugman and others have argued that it has been a central feature in determining trade dynamics, while others have argued that it has been just one of many factors.
3. China loosened capital controls after 2004 and moved from a fixed peg to a floating peg5 exchange rate between the renminbi and the US dollar, making it easier for the renminbi to fluctuate in global currency markets. The renminbi appreciated relative to the US dollar from 2005 to 2014, and has subsequently appreciated and depreciated relative to the US dollar. the interim, due to market dynamics and conscious policies, and yet the US trade deficit with China has grown over this period.
What would a depreciation strategy for the US dollar look like from the Federal Reserve? First, interest rate cuts: to make dollar denominated deposits less attractive, the Board of Governors would want to lower interest rates, in order to make returns on deposits elsewhere in the world more attractive. However, the Fed cuts rates for a number of reasons, including a desire to make it easier for firms and households to borrow in order to spend more. Indeed, Powell himself already announced back in August that the Fed was going to cut in September. So it’s not clear how much extra influence Miran is going to have with the most immediately upcoming Fed decision. In his capacity as chair of Trump’s Council of Economic Advisors, his advocacy for tariffs makes sense, since tariffs designed to make other countries’ exports more expensive work similarly to how currency depreciation might. But, the Fed doesn’t have anything to do with tariffs, except insofar as it is supposed to stabilize inflation rates, which are increasingly likely to have been affected by tariff policies. Finally, the Federal Reserve has historically played a role in stabilizing the global financial system in moments of financial panic by increasing its provision of liquidity to banks, in the US and Central Banks outside of the US to ensure that banks and other parties can keep getting payments on outstanding loans and interest. If the Fed decided to break with common practice, that could do a lot to affect exchange rates, but it would likely be devastating for domestic banks and US businesses, too.
All of this raises the question of why the US dollar achieved its global reserve currency status and why the US has its exorbitant privilege, which deserve at least a few more words than this already longer newsletter has room for. So more on all of this next week!
Ummm September 16, 2025, 8:48 am, EST. Look, the school year is back in session.
€1 to $1.18, if you’re curious.
I know.
It’s somewhat different terrain now since the elimination of de minimis though! More on this in a future post.
Exchange rate explainer: in a fixed, or hard, peg exchange rate, a central bank or monetary authority commits to purchasing and selling international currencies to the degree necessary to maintain a fixed exchange rate. In a soft (floating) peg exchange rate, the exchange rates are pegged within a range, and the pegs themselves may be allowed to change over time. Finally, a full floating or market based exchange rate allows exchange rates to fluctuate to their fullest, depending on what is happening in currency markets.