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 Trump himself will launch a sustained campaign to weaken the dollar as a way to reduce the U.S. trade deficit can’t be dismissed.
“The trade debate will increasingly include the currency issues,” said Charles Dallara, a former U.S. Treasury official and one of the architects of the Plaza Accord, the 1985 watershed agreement between the U.S. and four other countries to jointly depreciate the dollar. “It’s inevitable.”
Granted, Dallara didn’t specifically use the word manipulation. There’s something of a reluctance among analysts to associate the U.S., 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 $5.1 trillion-a-day currency market and undermine the dollar’s status as the world’s reserve currency, but could also weaken demand for U.S. assets.
Since falling toward a three-year low in April, the dollar has appreciated almost 6 percent, 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 dollar is also 11 percent above its average over the 13-year span of the dollar index.
A strong-dollar policy has been a cornerstone for successive U.S. administrations. The U.S. was also a key supporter of the July Group-of-20 pact that member economies will “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.”
Yet like many other things, Trump has shown a penchant for upending the status quo. Since taking office in 2017, he has routinely talked about wanting a weaker dollar to support U.S. manufacturing. His administration has arguably been, at best, lukewarm toward America’s traditional strong-dollar stance.
After a flurry of tweets in which Trump complained that the dollar is blunting America’s “competitive edge,” Michael Feroli, JPMorgan Chase’s chief U.S. 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 dollar intervention was no longer far-fetched.
‘Deliberate Effort’
“We haven’t had a deliberate effort to weaken the U.S. 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 U.S. assets -- including Treasury bonds -- raising interest costs for domestic borrowers.”