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Trump Triggers Currency War

Trump Triggers Currency War

 (Getty/Andrew Burtin)

By    |   Thursday, 09 February 2017 07:34 AM

The Trump overnight Twitter feed did not contain anything that’s likely to get markets excited.

It also did not contain any reference to the letter Trump sent to Chinese President Xi Jinping which stated the president “looks forward to working with President Xi to develop a constructive relationship that benefits both the United States and China.”

The letter marks a change in tone for Trump, who during his campaign relentlessly criticized China. He also vowed to label China as a "currency manipulator."

The next chapter in this saga could become very interesting.

Japanese Prime Minister Shinzo Abe, who will meet Trump on Friday, is apparently planning to urge him to concentrate on the G-7 and the G-20 when discussing currencies rather than targeting individual countries.

Good luck with that! It seems unlikely that someone of Trump’s temperament would be willing to engage in multilateral currency negotiations.

It’s also fair to say that the last time multilateral negotiations had any meaningful impact on currencies was in 1987 with the Louvre Accord. That agreement intended to stabilize the international currency markets and halt the continued decline of the US dollar. The dollar's tumble was caused by the Plaza Accord of 1985, which was signed by the G-7 Ministers of Finance and was intended to depreciate the greenback in relation to the yen and Germany's currency at the time, the Deutsche mark.

Of course, that was then and we lived in a very different foreign exchange world than the one we have today.

In Europe, Germany's trade surplus hit another all-time record of 252.9 billion euros ($270.5 billion) in 2016 and that was up from 244.3 billion euros ($261 billion) in 2015. That will not help the ongoing concerns about currencies.

Trump’s top trade adviser, Peter Navarro, accused Germany of currency exploitation said alleged that Berlin is using a "grossly undervalued" euro to gain advantage over trading partners

This is something that perhaps investors could keep an eye on.

For the Germans, this may also have a bearing on the developing Greek situation.
When many investors just thought, it was safe to go back to the Mediterranean, unfortunately “Greece is back!”

The dispute between the IMF and the EU over what is the right amount of Greek debt has become volatile once again and which remains without a solution, This is something that could reopen another phase of the Greek debt funding crisis saga.

This comes after the IMF said in its first annual audit of Greece's economy in nearly four years that Greece's debt is still unsustainable even after years of grinding austerity.

On the need for Greece to pursue further reforms to its pension and tax systems, IMF Chief Christine Lagarde said, "We tried, in full honesty, to be those ruthless truth-tellers ... Yes, we are criticized occasionally and I'm sure that the Greek authorities didn't like some of the things that we said ... Reforms are absolutely needed." 

German Finance Minister Wolfgang Schauble is also getting very animated on the topic. He declared that any kind of Greek debt reduction is impossible, especially in today’s political context.

Please don’t forget that we have general elections in Germany in September.

Meanwhile, St. Louis Fed President James Bullard is due to speak. Remember that on January 12, Bullard told the Forecasters Club of New York: “Now that the policy rate has been increased, the Committee may be in a better position to allow reinvestment to end or to otherwise reduce the size of the balance sheet … Adjustments to balance sheet policy might be viewed as a way to normalize Fed policy without putting exclusive emphasis on a higher policy rate path” whereby he has expressed some support for the idea of quantitative tightening. which should put less pressure on interest rates.

Let’s hope, what Bullard says today may help us somewhat in assessing where the Fed’s balance sheet could be headed for over the near term.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.


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It seems unlikely that someone of President Trump’s temperament would be willing to engage in multilateral negotiations.
trump, currencies, attack, fed
Thursday, 09 February 2017 07:34 AM
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