LONDON - U.S. President Donald Trump could escalate a war of words over foreign-exchange rates into another trade battle. He reckons China and Europe are manipulating their currencies and says the United States should match them, presumably by embarking on official U.S. intervention. That would open another front alongside Trump's tariff fights.
The United States has largely refrained from selling dollars with a view to softening its currency since the 1980s. Washington intervened in the mid-1990s to prop up the greenback, but has largely left traders to their own devices and stuck to the mantra that a strong dollar is in America's interests. Yet in the wake of Trump's remarks, Goldman Sachs now reckons “there’s a low but rising risk” of dollar selling.
Such a step would flout a long-standing agreement between the Group of Seven industrial nations and the Group of 20 big economies to avoid competitive currency devaluations. There is no sign that exchange rates are notably out of whack with economic fundamentals or moving in a disorderly fashion, two possible rationales for action. And while a Federal Reserve measure of the dollar’s inflation-adjusted value is up around 4 percent since the beginning of 2018, it’s not at extreme levels – and some dollar strength can be explained by relatively high U.S. interest rates.
Trump is not alone in suggesting that managed currencies, such as the Chinese yuan, are artificially weak. Brad Setser, a former U.S. Treasury official now at the Council on Foreign Relations, says intervention by other countries makes it harder for the United States to grow through exports during economic downturns, indirectly causing the U.S. government to spend more boosting demand and employment.
But that isn't a valid complaint about the euro. And U.S. intervention would carry risks. First, other countries might join the race to devalue. After all, the euro zone and Japan would have a better chance of boosting inflation if their currencies were weaker. Second, intervention would increase foreign-exchange volatility and make hedging more expensive for companies and investors. It could even turn international money managers against dollar-denominated assets and thus push up U.S. borrowing costs.
If Trump asks the Treasury to turn this latest rhetoric into action, there would be few, if any, winners.
- President Donald Trump on July 3 said the United States should match efforts by China and Europe to manipulate currencies and pump money into their economies.
- “China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games - as they have for many years!” Trump tweeted.
- A Goldman Sachs research note dated July 11 said: “Overall, we think direct FX intervention by the U.S. is a low but rising risk.”
(Editing by Richard Beales and Bob Cervi. Graphic by Vincent Flasseur.)
© Reuters News 2019