Fri, Aug 10, 2018 - Page 10 News List

Trump might devalue dollar as weapon in trade war, JPMorgan economist says

Bloomberg

With the US waging a trade war on several fronts, economists are starting to take seriously the idea that US President Donald Trump could act on his preference for a weak dollar.

“While not our base case scenario, we cannot rule out a turn toward a more interventionist currency policy, particularly since the current administration has, at times, hinted at a preference for dollar weakness or objected to perceived Chinese currency manipulation,” Michael Feroli, JPMorgan Chase & Co’s chief US economist, said in a research note this week.

In a Twitter flurry last month, Trump accused China and the eurozone of manipulating their currencies, and complained that a rising dollar is blunting the US’ “competitive edge.”

In a reference to interest rate hikes by the US Federal Reserve, the president said “tightening now hurts all that we have done.”

The US has not intervened in markets to sell the dollar since 2000, when it united with G7 members in an effort to boost the sliding euro.

It last bought greenbacks in 2011 as part of an international bid to stop the yen from surging after an earthquake and tsunami in Japan led locals to repatriate cash.

However, analysts are awakening to the reality that Trump might follow through on his jawboning, with potential implications for the independence of the Fed.

“We believe the Fed would fall in line and play their usual role of following [the US Department of] Treasury’s lead on dollar policy,” Feroli said.

However, he added that currency intervention would likely have no effect on monetary policy, as the central bank would likely “sterilize” the transactions by purchasing an offsetting amount of US securities at home, thus leaving the monetary base unchanged.

Any attempt to massage the dollar’s value in markets would risk undermining Trump’s argument last month that China has been manipulating its currency.

The US has long championed a G20 pact that member economies will “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.”

If China takes the lead in a currency war, letting the value of the yuan fall, it could have a deflationary impact around the world, since a stronger dollar would tighten global liquidity, Oxford Economics said in a note this week.

For now, the People’s Bank of China is suggesting it will not support a steep drop in the yuan, with the central bank intervening last week to support the currency, after it slid to its lowest level in more than a year.

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