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Trump, a currency manipulator? Wall St isn't ruling it out

There is a possibility US president himself will launch a campaign to weaken greenback

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Mr Trump handing a signed five-dollar bill back to a supporter in Walterboro during the presidential election.

New York

THE United States of America, a currency manipulator? It's a label more frequently slapped on developing export economies and one that President Donald Trump took up just this week to browbeat China and Europe in his increasingly pitched trade war.

But as outlandish as it sounds, some Wall Street observers say the possibility that Mr Trump himself will launch a sustained campaign to weaken the US dollar as a way to reduce the US trade deficit can't be dismissed.

"The trade debate will increasingly include the currency issues," said Charles Dallara, a former US Treasury official and one of the architects of the Plaza Accord, the 1985 watershed agreement between the US and four other countries to jointly depreciate the US dollar. "It's inevitable."

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Granted, Mr Dallara didn't specifically use the word manipulation. There's something of a reluctance among analysts to associate the US, the standard-bearer for free-market principles, with the term. They prefer to refer to it as foreign-exchange intervention.

Semantics aside, a shift to a more protectionist and interventionist policy, à la 1985, would not only reverberate across the US$5.1 trillion-a-day currency market and undermine the US dollar's status as the world's reserve currency, but could also weaken demand for US assets.

Since falling toward a three-year low in April, the US dollar has appreciated almost 6 per cent, according to the Bloomberg Dollar Spot Index. Its advance last quarter was the strongest since 2016, as the greenback appreciated against all 16 major currencies. The US dollar is also 11 per cent above its average over the 13-year span of the dollar index.

Since taking office in 2017, Mr Trump has routinely talked about wanting a weaker US dollar to support US manufacturing. His administration has arguably been, at best, lukewarm toward America's traditional strong- dollar stance.

After a flurry of tweets in which Mr Trump complained that the US dollar is blunting America's "competitive edge", Michael Feroli, JPMorgan Chase's chief US economist, wrote in a report this month that he can't rule out the possibility the administration will intervene in the currency markets to weaken the greenback.

Both Deutsche Bank and OppenheimerFunds echoed the view, saying US dollar intervention was no longer far-fetched.

"We haven't had a deliberate effort to weaken the US dollar perhaps since the Plaza Accord in 1985, so it is very unusual and against established practice over the last several decades," said Zach Pandl, co-head of global FX strategy at Goldman Sachs. "A deliberate policy to pursue a weaker currency could cause foreign investors to shy away from US assets - including Treasury bonds - raising interest costs for domestic borrowers."

There are some signs that Mr Trump's persistent jawboning of the US dollar may already be having an adverse effect on foreign demand for US assets. While overall demand at auction has been up and down this year, foreign holdings of Treasuries have slumped to an almost 15-year low of 41 per cent.

China, the largest overseas creditor, has pulled back this year. Japan, the second biggest, has reduced its share to the lowest level since at least 2000.

In recent months, Mr Trump has stepped up the rhetoric as the US dollar has bounced off its lows. In an interview published by Reuters this week, Mr Trump once again accused China and the European Union of manipulating their currencies.

Last Friday, he also complained to wealthy Republican donors that he was "not thrilled" with the Federal Reserve's interest-rate increases under chairman Jerome Powell, which have boosted the US dollar.

So what tools does Mr Trump have at his disposal if he wanted to go beyond mere talk?

The most direct would be for him to order the US Treasury (via the New York Fed) to sell US dollars and buy currencies like the yen and euro using its Exchange Stabilization Fund, according to Viraj Patel, an FX strategist at ING.

But because the fund only holds US$22 billion of dollar assets, the impact would likely be minimal. Any direct intervention that is larger and more ambitious in scope would also require congressional approval, he noted.

However, Mr Patel says there is one loophole Mr Trump could exploit to get around the fund's constraints and bypass Congress altogether: by declaring FX intervention a "national emergency". By doing so, he could then force the Fed to use its own account to sell US dollars.

Such a move would be a long shot by any stretch of the imagination, but with Mr Trump invoking national security to impose tariffs, Mr Patel says he can't "completely rule out" the possibility.

A less extreme, and more plausible, option would be for the Trump administration to include currency clauses in any new trade deals, like it did with the updated US-South Korea trade agreement in March. There are plenty of caveats, of course, and the odds of any kind of US intervention are still low.

The yuan has tumbled 9 per cent since April, when trade friction with China started to intensify. The magnitude of the decline, by some measures the fastest since the 1994 devaluation, boosted speculation the People's Bank of China (PBOC) is deliberately weakening the yuan to offset the tariff impact.

There are reasons to think that China isn't trying to weaponise the yuan. A senior official at the PBOC said this week that China won't use competitive currency devaluation as a tool to cope with trade tensions.

Earlier this month, the central bank effectively made it more expensive to short the currency as it sought yuan stability.

Eurizon SLJ Capital's Stephen Jen warns that Mr Trump may be quick to retaliate in the FX markets if it suspects that China is "playing games with its currency", which may have disastrous effects on demand for US assets. BLOOMBERG