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Trump's Currency Tweet May Spark 'Race to the Bottom'

Trump's Currency Tweet May Spark 'Race to the Bottom'

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Tuesday, 17 April 2018 09:27 AM Current | Bio | Archive

Financial markets were treated to an insight into the U.S. administration’s foreign-exchange policies.

Trump accused Russia and China on Monday of devaluing their currencies while the United States raises interest rates, prompting China to accuse the United States of sending confusing messages.

Trump said in a Twitter post Monday that "Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!"

The insight was that the policy is confused, perhaps a little muddled as to what is actually happening. The gist of the Trump Twitter feed was that the dollar should probably go down. There may also have been an implicit attack on the Federal Reserve included in that, but it’s hard to tell within the constraints of the tweet.

Anyway, by singling out the currencies of China and Russia, Trump is effectively putting the foreign-exchange market on notice that a race to the bottom could be on the cards. The dollar spot index promptly fell the most in three weeks.

All this seems at least to be confusing for the very simple reason that the U.S. Department of the Treasury delivered on April 13 to Congress its semiannual Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.

The report concluded that while the currency practices of six countries were found to require close attention, no major U.S. trading partner met the relevant legislative criteria for enhanced analysis in 2017. Further, no trading partner was found to have met the legislative standards for currency manipulation during the current reporting period.

Should financial markets, and thus investors care?

When there is a case of confusion over a fairly key economic policy then this is a signal that markets and thus investors should care about.

There was also confusion over the policy of applying further sanctions to Russia, which is also another economically meaningful policy.

However, aside from worrying about muddled thinking, the views of politicians on currencies are not generally that important.

It’s a fact that the dollar is vulnerable, not because of the views of Trump, but because of the policies of Trump, amongst other things.

The U.S. administration has aggressively pursued a policy calculated to increase the size of the U.S. current account deficit. That means that the United States needs to borrow more and more from the rest of the world.

At the same time, the rest of the world is less and less inclined to lend money to the United States.

That combination puts the dollar under downward pressure.

Muddled policy understanding and uncertainty over policy “may”, at the margin, reduce international investors’ confidence to invest in the United States, and thus pressure the dollar.

But that isn’t really new information for markets as well as for well-informed investors at this stage.  

In other U.S. economic news, Trump has nominated Richard Clarida, an economist who advises fund manager Pimco, and Michelle Bowman, a Kansas banking regulator, for two key positions at the U.S. Federal Reserve.

This is welcome news as the Federal Reserve was running rather short of governors who are in a very distinct minority on the FOMC rate setting committee.

If they are confirmed by the Senate, Clarida would serve as vice chairman of the U.S. central bank’s Board of Governors and Bowman would become a member of the board.

The previous nomination to be a Governor to the Board Marvin Goodfriend has yet to be confirmed by the Senate. However, his nomination may well be rejected as he faces opposition from most Democrats and Senator Rand Paul.

On the information available, the two  new nominees would not change the direction of the Fed’s monetary policy significantly.

Williams, the newly proposed New York Fed President is to speak today and as the voice of economics on the Fed at the moment is going to be worth listening to.

In China, first quarter GDP came in exactly as expected at 6.8 percent. Investors are not exactly reeling at the news that the data came in exactly as expected. It is expected that key Chinese numbers will come in exactly as expected.

There wasn’t much surprise in the Chinese retail sales that came in at 10.1 percent y/y. Industrial production rose by 6.0 percent year-on-year in March, below market expectations of 6.4 percent.

Maybe it could be helpful for investors keeping in mind that there are only two (2) major economies that do not have independent statistical agencies. One is China and the other one is Canada, which rather dampens financial markets’ enthusiasm for key data releases from those two countries.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

© 2018 Newsmax Finance. All rights reserved.

   
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Anyway, by singling out the currencies of China and Russia, Trump is effectively putting the foreign-exchange market on notice that a race to the bottom could be in the cards.
trump, twitter, dollar, fed, currency, china
809
2018-27-17
Tuesday, 17 April 2018 09:27 AM
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