The US would probably win in an escalating “cold currency war,” according to Pacific Investment Management’s (Pimco) global economic advisor Joachim Fels told CNBC.

The term “cold currency war” refers to a conflict that is not fought with direct central bank intervention in the foreign exchange markets, but with using cuts to borrowing costs, negative interest rates, like those in Europe and Japan, quantitative easing (QE) and yield curve control.

In the case of the US, tweets by the president is considered a factor in the mix, Fels said n Monday.

“If there is a winner in this ‘cold currency war,’ it’s going to be the US in the sense that the dollar is more likely to weaken than strengthen from here,” Fels said.

At 1:22 pm GMT, the US dollar index, which gauges the greenback against six major rivals, ticked up by 0.04% to 97.19.

Shortly after being elected in early 2017, US President Donald Trump discussed with Treasury Secretary Steven Mnuchin the need for a softer dollar, and thus, the currency ended up weaker for the entire year.

While “the same could happen again, especially as the Fed obviously has more room to cut interest rates than the [European Central Bank] or the Bank of Japan, […] the US administration probably has the upper hand in this currency war,” Fels said.

The US Federal Reserve and the Bank of Japan (BoJ) could cut interest rates soon, while the European Central Bank (ECB) is expected to cut interest rates later this year.

“Clearly, we are getting back into the situation where everybody would like to see a weaker currency [and] nobody, no central bank, really wants a stronger currency and that’s why it’s a cold currency war,” Fels said.

Posing the question of whether the Fed would decide to cut rates by 25 basis points (bps) over two times or in one shot, Pimco’s advisor sees an at least a 50-50 bps chance that US policymakers would “decide to go a little bit more aggressive.”

Source: Mubasher

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