False Claims

April 16, 2018

The experience of 45 years since governments in the major economies adopted a system of market-determined flexible exchange rates has taught officials to treat currency policy as a delicate matter. The less that is said by officials about their own or other currencies, the better. Currency policy in the United States falls under the jurisdiction of the Treasury Department, and even Treasury Secretaries rarely comment directly on the dollar’s value.

Although central bank monetary policies exert major influence on the internal value of money, which inadvertently affects their external values as well, central bank governors, whether it be the the Federal Reserve Chairman, the European Central Bank President, or the Governor of the Bank of Japan, generally defer from commenting on foreign exchange conditions.

Currency market guidance for foreign exchange policy tends to be coordinated by governments and enshrined in periodic statements signed by finance ministers and central bank governors. A Group of Twenty statement released last month after a meeting in Buenos Aires, included the following language:

Strong fundamentals, sound policies, and a resilient international monetary system are essential to the stability of exchange rates, contributing to strong and sustainable growth and investment. Flexible exchange rates, where feasible, can serve as a shock absorber. We recognize that excessive volatility or disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will refrain from competitive devaluations, and will not target our exchange rates for competitive purposes

U.S. presidents almost never comment on foreign exchange. Donald Trump’s tweet on the matter earlier today stands out uniquely for its specificity and accusatory tone.

Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!

President Trump’s claim misses the mark on several counts. First, while the tweet insinuates that actions by the Russian and Chinese governments are responsible for a weaker yuan and ruble, tighter U.S. monetary policy, other things being the same, would ordinarily be expected to boost the dollar. Second, other things are not the same. If anything, the Trump Administration, by renouncing a role of leader of the free world and and by threatening import tariffs, has encouraged investors to become less confidence about the dollar’s direction. The comment by Treasury Secretary Mnuchin three months ago that welcomed a weaker greenback were seen by others as a green light to sell the dollar.

Third, the tweet seems implies that the dollar is strengthening. In real effective terms, the dollar is in fact 11.0% cheaper than in late December 2016, three weeks before Trump was inaugurated. The trade-weighted yuan, by contrast, has appreciated 7.3% since last June and 56% since the end of 2004. Regarding Russia, two-way U.S. trade with that economy represents all of a half of one percent of total U.S. merchandise trade, so the accusation of ruble undervaluation would be trivial if authentic. The ruble had been trading decently until the recent augmentation of U.S. sanctions against Russia, which naturally generated selling pressure.

Fourth, the timing of President Trump’s tweet is odd. Twice a year, the Treasury Department sends Congress a comprehensive review of macroeconomic policies of major U.S. trading partners. This is the designated opportunity for the U.S. to accuse another government of being a currency manipulator. In the latest statement, released on April 13, neither China nor Russia nor any other major U.S. trading partner was so designated. The report does complain that the bilateral merchandise trade deficit with China represents a major share of the overall U.S. deficit, but concedes that China has intervened in a way to weaken the yuan and that its current account imbalance isn’t large. The report has no explicit section on Russia. And it treats Germany separately from the euro area, even though Germany doesn’t have its own currency and distinct monetary policy.

Fifth, what exactly is meant by “Unacceptable!” What Trump prepared to do in response? It looks like the intent is a threat of tariffs, forcing governments to renegotiate treaties like TPP or Nafta in a disadvantageous way for them, and if those concessions are not forthcoming, the U.S. will play the a protectionism card. Doing that will not reduce the global U.S. trade or current account balance but will boost U.S. inflation and distort economic conditions across industrial sectors, with a few being helped but many others hurt. To cut the U.S. deficit, the excess of investment over savings has to be reduced. The recent tax cut will in fact accomplish just the reverse.

A final takeaway from Trump’s tweet is that the U.S. is breaking yet another convention to which previous Democratic and Republican administrations adhered. It’s fair game for the U.S. president to speak about currencies in spite of G20 and G7 accords for heads of government to avoid such rhetoric. While the tweet is framed as an accusation of other government’s meddling in the foreign exchange market for competitive advantage, the intent is in fact to do on behalf of the United States the very accusation of bad behavior being alleged on the part of other countries.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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