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Be ‘Prepared for Anything’ as Trump Slams Europe, China on FX

U.S. President Donald Trump’s latest accusation of currency manipulation has foreign-exchange analysts game-planning the administration’s next move.
Bloomberg
By Bloomberg
4 Jul
President Donald Trump Departs White House En Route To Colorado WASHINGTON, DC - MAY 30: U.S. President Donald Trump answers questions on the comments of special counsel Robert Mueller while departing the White House May 30, 2019 in Washington, DC. Trump is scheduled to attend the commencement ceremony at the U.S. Air Force Academy in Colorado later in the day.(Photo by Win McNamee/Getty Images)

U.S. President Donald Trump’ tweeted Wednesday that Europe and China are playing a “big currency manipulation game,” days after he declared a tariff ceasefire with Chinese leader Xi Jinping. For market observers, the president seemed to suggest going beyond mere jawboning. His call to “MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games” has strategists considering the possibility that the U.S. Treasury could intervene to weaken the dollar.The U.S. hasn’t intervened in FX markets since 2011, when it stepped in to strengthen the dollar as part of an international effort after the yen soared in the wake of that year’s devastating earthquake in Japan. But with Trump’s repeated complaints about dollar strength -- even after the U.S. refrained from formally labeling China a currency manipulator at the end of May -- anything is on the table, according to Canadian Imperial Bank of Commerce.

Presidential ‘Obsession’

“The obsession with currency manipulation -- a month after the last Treasury report had different conclusions -- means we should be prepared for anything,” said Bipan Rai, CIBC’s North American head of foreign-exchange strategy. “The Treasury hasn’t intervened to weaken the dollar for decades, but we wouldn’t be surprised if that changes potentially under Trump.”

Trade-weighted index close to 2002 high

The euro touched the day’s high on Trump’s tweet Wednesday before retreating. The latest missive did little to rattle the offshore yuan, which is roughly unchanged near 6.88 per dollar. The Bloomberg Dollar Spot Index is down about 0.5% this year, after a 3.2% gain in 2018. But using a Federal Reserve trade-weighted measure, the dollar is not far below the strongest since 2002, which threatens to make U.S. exports less competitive abroad.

The risk of intervention increases should the Fed decide not to ease policy at its meeting this month, Rai said. Trump has staged a campaign against Fed Chairman Jerome Powell in recent months, comparing the central bank to a “stubborn child” last month for not cutting rates.

Trump may ramp up his jawboning efforts as other major central banks start to ease, said Anthony Doyle, global cross-asset investment specialist at Fidelity International.

“I wouldn’t be surprised if jawboning was to increase in coming months,” Doyle said in an interview with Bloomberg Television. “Generating inflationary pressures, generating competitiveness through a lower currency is one tool that central banks can use to support their economies and it’s the only game in town at the moment.”

Not Enough

Even if the Fed does lower rates in a few weeks -- a move that bond traders overwhelmingly expect-- that might not be enough for the president, according to Bank of America Corp.

“The president is likely to get his way at least for the time being,” foreign-exchange strategist Ben Randol said via email.

“However, the problem arises if U.S. economic outperformance continues and the dollar proves accordingly resilient,” he said. “In that case, the temptation to intervene in FX markets will increase if Fed cuts don’t do the trick.”

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