– Dollar’s strength under fresh attack ahead of the weekend
– European Union, China accused of currency manipulation
– But there is little Trump can do to stop the Dollar’s ascent say analysts
– Seperately, Trump threatens to tariff all China’s imports
Ed Note: for the impact on markets that Trump’s attack has had check out ZeroHedge’s “Dollar Tumbles As Trump Blasts China, EU “Currency Manipulation”, Fed “Tightening”
US President Donald Trump has fired another salvo in what appears to be the start of a potential currency war by accusing the European Union, China, and others, of artificially massaging their interest rates and currency lower.
“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the Dollar gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field,” Trump tweet at 13:43 B.S.T.
The tweet sent the US Dollar lower allowing the Pound-to-Dollar exchange rate the chance to stage a climb back to 1.3062, having been below 1.30 just 24 hours earlier. The EUR/USD exchange rate menawhile rose 0.45% on the day to reach 1.1707.
The tweet builds on an earlier attack by Trump on the Dollar’s strength when he said in an interview he is “not thrilled” by the Federal Reserve’s ongoing interest rate hikes which are providing the key underpinning to a stronger US Dollar.
The Fed came in for another mention via a 1:51 P.M. tweet that came hot on the heels of that accusing the EU and China of manipulating their currency:
“The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”
The message from Trump is that the stronger Dollar is unattractive to him as he tries to improve the USA’s global trade performance, and the Fed is partly responsible.
No doubt Trump has been keeping an eye on the sharp rise in the value of the Dollar against the Chinese Renminbi of late, a move that is softening the blow to China of the tariffs lifted against Chinese imports.
Seperately, Trump has threatened to put tariffs on all $500BN worth of goods imported by the USA in a sign that there will be an end-game to the trade war.
This appears to be a strong, all-out attack on China which is extraordinary.
But, the attack on the European Union is also extraordinary if we consider the accusations being levelled against the European Central Bank (which ultimately manages the Eurozone’s currency) could just have easily have been levelled against the US Federal Reserve a few years ago.
The ‘manipulation’ of the Euro no doubt refers to the ECB’s quanitative easing programme whereby the central bank purchases tranches of government and corporate bonds in order to keep the yield (interest rate) paid by those bonds low. Hence, interest rates are kept low which in turn keeps the currency discounted.
But, quantitative easing was introduced by the US Fed long before the ECB!
“FX markets were rattled by Trump’s comments that he prefers a weaker USD and lower interest rate policy,” say TD Securities in a foreign exchange briefing.
The obvious question at this juncture is whether or not Trump has the ability to succeed in driving a weaker Dollar?
We have seen time and again that rhetoric can have an impact on currencies, but for a limited time. What is important is that the rhetoric is backed up by real action.
If not, the bluster loses its impact.
Therefore the US President must come up with a strategy of materially weakening the Dollar if he is to succeed in bringing it down on a sustainable basis.
“Substitutes to the USD are not as attractive at this time given that it still holds a considerable carry advantage. As such, the moves in EUR & JPY are likely to be short-lived,” say TD Securities.
Analyst Adam Cole with RBC Capital Markets meanwhile briefs that “the risk of the Federal yielding to political pressure is minimal.”
We agree with this view – there is very little chance the Federal Reserve will yield to the President and they will likely maintain their current policy stance to deliver a slew of further interest rate rises.
What would shift the Fed’s stance is a slowdown in economic activity, and for Trump this would be considered a sour turn of events.
Indeed on this basis, the President will sleep better with the knowledge the Dollar is rising rather than falling as confidence in his economy fades.
However, analysts at ING Bank N.V. believe that Trump’s comments will mark an end to the Dollar’s rise.
“The President’s comments are more likely to, on the margin, stem flows into USD assets given renewed uncertainty over the US administration’s dollar policy,” says Viraj Patel, a foreign exchange strategist with ING in London. “We’re unlikely to see the same degree (and sharp extent) of USD weakness that we saw the last time administration talked about the Dollar.”
In January 2018, during the last episode of weaker Dollar rhetoric, Patel notes the Dollar index index fell around 5% over a short window, with Secretary Mnuchin partly adding fuel to the weak USD fire.
“We shouldn’t get too carried away. The political economy of the Dollar is a medium-term negative; however, the fundamental outlook for major currencies – such as the EUR, JPY and CNY – is considerably weaker relative to January 2018,” adds Patel.