In President Donald Trump’s world view, currency manipulation is bad, except when he’s the one calling the shots.
Usurping the Treasury Department’s imminent report on global foreign exchange policy, Trump told the Wall Street Journal the dollar is “getting too strong,” igniting a slump in the greenback just as traders in the U.S. were wrapping up.
The comments, which saw him also back down on a long-held vow to label China a currency manipulator, were widely viewed as jawboning, putting the U.S. in the same basket as the FX-market tinkerers Trump and American officials have so heavily criticized in the past.
“While we can count on the fingers of one hand the number of times Presidents Obama or Bush talked about the U.S. dollar’s value, President Trump is of course happy to be different,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “It is clear that he does not regard talking about the currency as manipulation, rather just plain speaking.”
The dollar’s losses seeped into Asian trade Thursday, with currencies from South Korea to China — both countries that employ management techniques that go well beyond jawboning — enjoying gains. While history shows the impact of talking down a currency is usually short-lived, Trump deciding to comment directly on the greenback could ultimately hurt his own credibility, given he repeatedly accused nations such as China and Germany of weakening their currencies to fuel an unfair trade advantage over the U.S.
“Of course, he’s risking his credibility, but Trump doesn’t seem to care,” said Axel Merk, president of Merk Investments LLC in San Francisco. “The cheapest policy is one where you can move the currency around by word of mouth. So he might be encouraged.”
China, the country that drew most of Trump’s ire when it comes to alleged manipulation, appeared to be a beneficiary of his jawboning. While the yuan rose 0.2 percent versus the dollar as of 1:30 p.m. in Shanghai, it weakened against other major peers, falling 0.2 percent versus a replica of the 24-currency basket Chinese policy makers use to track the yuan, the most since March 21.
“Trump is now returning a little gift to China after Xi’s visit last week,” said Nathan Chow, an economist in Hong Kong at DBS Bank. “This is an easy gift anyway as China doesn’t meet all the Treasury’s requirements as a manipulator.”
The U.S. is expected this month to release its first report under Trump on the foreign-currency practices. This is the formal channel to impose a manipulator designation and can lead to negotiations and penalties. The department is required by law to report to Congress twice a year on whether America’s major trading partners are gaming their currencies.
The last report, in October, included China and five other nations on a watch list of countries at risk of engaging in unfair conduct, but it didn’t name any country a manipulator — a step the U.S. hasn’t taken since 1994. Trump acknowledged to the Journal that China hasn’t been intervening to weaken its currency recently. After its biggest annual loss in at least two decades last year, the yuan has climbed 1 percent against the dollar in 2017.
There are more grievous ways to intervene in a currency than jawboning.
Most developing nations in Asia — from India to Indonesia — tap their foreign reserves to manage currency moves. China used its stockpile, the world’s largest, to stem declines in the yuan before the imposition of capital controls late last year eased depreciation pressures. Malaysia has basically killed offshore ringgit trading by discouraging foreign banks from trading non-deliverable forwards, a bid to deter speculation on the currency.
Japan, which was targeted by Trump earlier in the year, hit back at the U.S. saying its accommodative monetary policy was aimed at stoking inflation, not at keeping a lid on the yen. The Japanese currency has also climbed this year, with its 7.5 percent advance against the dollar making it the biggest gainer after Mexico’s peso among major currencies.
Trump’s dollar jawboning does give countries with a track record of intervening in their currencies some moral high ground, says Tom Orlik, chief Asia economist for Bloomberg Intelligence.
But it doesn’t mean they’ll find currency management easy, he said. “The lesson of the last 30 years is that governments typically can’t fight the market on foreign exchange.”
For Ray Attrill, the lines are blurred when it comes to what constitutes unfair interference in the market. The global co-head of foreign exchange at National Australia Bank Ltd. says the U.S. has been “the world’s biggest currency manipulator” since the global financial crisis, with the Federal Reserve’s quantitative easing driving the greenback’s moves.
But that doesn’t mean Trump will win this battle.
“If Trump succeeds in prosecuting his policy agenda — on tax reform in particular — a stronger dollar will follow from that,” Attrill said. “Hard policy, not rhetoric, will ultimately determine where the currency goes.”