US interest rate cuts are scheduled to mitigate the economic impact of the dollar's appreciation, Fed policy makers said in minutes of their last meeting, which was published this week. But it is likely that Donald Trump's focus on the strong dollar holds.
In recent weeks, the president of the United States accused a large number of countries of being currency manipulators and threatened to impose sanctions, and repeatedly cited the strength of the dollar in an attempt to pressure Federal Reserve Chairman Jay Powell, to reduce rates.
In May, the US Treasury added Ireland, Italy and Germany to its watch list of currency handlers, placing them next to China, Vietnam and Singapore, even though they are part of the eurozone and have no direct national control on monetary policy.
For the first time in a decade, the tactics of the devaluation of the competitive currency of the "neighbor's beggar" are returning.
"It seems that we are facing a broader monetary policy war and the currency problem is a symptom of that," said Geoff Yu, director of the UK investment office at UBS Wealth Management.
But this is due to a fundamental misunderstanding of what drives the currency markets, badysts say. The strong dollar is the result of EE. UU Outperform other economies and the fact that its interest rate is higher than in most other developed nations, which triggers capital flows.
Alessio de Longis, a senior portfolio manager at Oppenheimer Funds in New York, said policymakers in the United States were able to raise rates at a time when growth outside the United States. UU It was still weak, which made the dollar appreciate.
"[The strong dollar] it is not an anomaly, "he said, adding that since Trump took office, the threat of a currency war had loomed over the global economy, so" we are in a permanent state of negotiation of trade agreements. "
Ed Al-Hussainy, a senior currency and rate badyst at Columbia Threadneedle, said the inclusion of Ireland and Italy in the Treasury watch list report "almost equals professional negligence" and that the report contained "something insane" Even China is not manipulating Your currency no longer.
"Where the rubber touches the ground is the renminbi. [and] there is no evidence that the Chinese central bank has intervened or manipulated its currency. . . The language of the White House has to be interpreted from a re-election. [perspective]"Mr. Al-Hussainy said.
Mark Sobel, a veteran of the US Treasury UU And chairman of the OMFIF expert committee, he said that although there had been a case to label China as a currency manipulator a decade ago, that was no longer the case.
In the last semi-annual report of the US Treasury. UU., The Asian giant only met one of the three criteria: have a significant bilateral trade surplus with the US. UU., An "important" current account surplus and a "unilateral and persistent intervention" abroad. Exchange markets – and, he said, this was not enough to merit the label.
Maximillian Lin, emerging markets strategist at NatWest Markets in Singapore, said Trump's accusation against the renminbi could have delayed water until around 2014, but data on China's currency holdings since then showed that the Banco Popular de China did not sell money.
"The Chinese [renminbi] It is a victim of commercial war, not a weapon, "he said.
It's a remarkable turnaround from the situation a decade ago, the last time currency manipulation soared in geopolitical circles.
Then, after the financial crisis, the aggressive policy of easing the US Federal Reserve. UU It overwhelmed emerging economies in a crisis.
At the time that US politicians showed little sympathy for the difficult situation of countries like Brazil, moving forward with relief measures, regardless of the impact that a weak dollar had on other economies as increasing exchange rates affected their export earnings .
By 2010, the central banks of Brazil, Japan, South Korea, Taiwan and China intervened regularly to contain the appreciation of their currencies, which led the Brazilian finance minister, Guido Mantega, to declare that the world was in the middle of an international currency war.
The current situation, on the other hand, has the United States as the victim of markets.
"It's a different kind of monetary war when the United States thinks it's losing," said Kit Juckes, currency strategist at Société Générale.
In addition to rate cuts and sanctions, there are other tactics that Mr. Trump could apply.
Joseph Gagnon and Fred Bergsten of the Peterson Institute for International Economics suggest that the White House could consider retaliation through the currency market itself: when a G20 country intervenes to devalue its currency, EE. UU Could implement a compensatory market intervention.
For example, if Switzerland acted to weaken its currency by selling the franc, the Treasury could intervene to buy the same amount of the Swiss currency, canceling the intervention. "Nobody in the world has more firepower than the Treasury of the United States," said Mr. Gagnon.
George Saravelos, strategist at Deutsche Bank, said an intervention on the dollar "would not be unprecedented" and that previous administrations under Carter, Bush and Clinton undertook "frequent and significant interventions."
"It has entered and gone out of fashion in recent decades," said Mr. Saravelos.
However, when it comes to taking action, some badysts suspect that the Trump administration does not have a unified stance.
Mr. Gagnon said that "the Treasury is trying to find reasons to do nothing," but added that "if the White House will force them to take action." . . It's another question. "
Additional reporting by Hudson Lockett in Hong Kong