The trade war’s August escalation has spooked markets -- and central banks -- around the world. The bad news, though, is that while President Donald Trump has fired two large weapons in the past week by green-lighting his biggest swathe of tariffs yet and formally branding China a currency manipulator, his arsenal is far from exhausted.
The loudest shot Trump could take may be the one that he increasingly appears focused on: weaponizing the dollar, the world’s reserve currency.
In a series of tweets on Thursday he called for the Federal Reserve to cut rates and weaken the dollar to benefit American exporters, effectively shrugging off a long-standing G-20 compact the U.S. signed again just weeks ago for the world’s major economies not to engage in competitive currency devaluations.
Inside the White House, hawks have been pushing for a direct intervention in currency markets by the Treasury by pointing to a slowdown in U.S. manufacturing, which many economists have blamed on tariffs imposed by Trump and uncertainty surrounding his trade war with China.
Just how effective either a Fed cut or an intervention would be is unclear. The relevant Treasury fund has $92 billion in it. Even if the Fed were to join in, as it has in past interventions, and match that amount -- a $180 billion injection into a $5 trillion per day global foreign-exchange market might have a limited effect. It might also unnerve markets and have longer-term economic consequences.
But while the president and markets are focused on a possible currency intervention, that’s far from the last weapon he has available, according to current and former U.S. officials, advisers to the administration and analysts.
Drop In The Bucket
“He’s only dipped into the deep well of the measures that could be used against China,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics who was among the first analysts to identify the array of tariff measures Trump had available to him during the 2016 presidential campaign.
Trump could turn back to his favorite tool, tariffs, and double-down on his threat to impose import taxes on all remaining imports from China, or some $300 billion in annual trade, by raising the levies he last week vowed to impose Sept. 1 from 10% to 25%. At a time when Trump is focused on currency movements, the irony is that move would weaken the yuan, as it has before, thus undermining his efforts to talk down the dollar. Yet Trump has used currency swings as justification for tariffs before.
That’s far from the end of it.