Does the White House want to revive the currency war ?

Dollar vs euro. Business man in suit holding 50 banknote and bill in both currency in hand. Exchange rate, world economy and financial concept.

The US currency, which the Secretary of the Treasury wanted “weaker” and Donald Trump “stronger”, weakened, especially against the Euro.
As the ECB meets on Thursday and is expected to announce the continuation of its current policy of support for the economy, US Treasury Secretary Steven Mnuchin has taken the financial markets by surprise. It has plunged the greenback with a steep statement in favor of a weak dollar that cuts drastically with the traditional American doctrine. At the Davos Economic Forum in Switzerland, Mr Mnuchin shattered the decades-old rhetoric that, as Robert Rubin, Bill Clinton’s Treasury Secretary, repeated: “Only a dollar strong is in the interest of the United States. ”
On the contrary, Mr Mnuchin bluntly dropped Wednesday that a “weaker dollar” was “good” for the country as it promotes “trade and opportunities”.
The idea is that a weaker dollar will make US exports more competitive, while by raising import prices it will discourage them and thus reduce the trade deficit of the world’s largest economy, one of the objectives. from President Trump. In the wake of this statement punch, the greenback has lost 1%, making the euro soar to the highest level for more than three years. In taking this position, Steven Mnuchin seems to be wielding an extra weapon in the trade war waged by Washington that wants to promote “America first”.
A deliberate strategy ?
“It’s kind of part of the trade war,” says Joseph Gagnon, an economist at the Peterson Institute for International Economics (PIIE), who welcomes the statement. “I was happy to hear that, a strong dollar has been very damaging and it has lasted for too long,” said the economist, saying that Europe and especially Germany have taken advantage of this currency gap to boost their surplus commercial with the United States. He admits that with interest rates higher than the EU and a more advanced economic cycle the US currency justifies being a little stronger than the euro. “But when the euro fell to $ 1.09, it was way too low, and I think that at a similar interest rate and economic cycle the euro should be at 1.50,” says the former economist. from the Fed.
In view of the magnitude of the reaction Wednesday on the foreign exchange market – the euro having passed the 1.2415 mark on Wednesday in New York -, Secretary of Commerce Wilbur Ross, also in Davos, wanted to calm the game He assured that his Treasury colleague had not wanted to act on the greenback: “He was not advocating anything, he was just saying that this is not the biggest concern in the world for us right now,” he said. he affirmed.
The White House, for its part, remained evasive, supporting between the lines the position of Mr. Mnuchin. “We have a stable dollar that reflects how the economy is doing,” said Donald Trump spokeswoman Sarah Sanders, pointing to the greenback’s reserve currency role. “We believe in a currency that circulates freely,” she added.
Would the words of Steven Mnuchin have gone beyond his thought? Not sure. For Joel Naroff, an independent economist interviewed by AFP, “Mr. Mnuchin is a man who says what he thinks, without much filter”. “He was speaking on behalf of the entire government, I do not know, but I suspect they will be happy if the dollar goes down,” he said ironically.
The risk of inflation
But for other observers, it is a risky strategy for the administration to lower the greenback with comments. “It can cause a race of currencies down, because everyone wants to have a currency more competitive than the dollar or its trading partner,” warns Greg Daco, chief economist of Oxford Economics in the United States. “If the administration now openly says it wants a weaker dollar, it opens the door to artificially lowering other currencies that want to stay below the dollar,” he said.
Some emerging countries, or even China, could thus let depreciate their currency to remain competitive commercially. He even mentions the euro zone which, “opting in the least disturbing way possible, could choose to delay the rise in interest rates”, which would have the effect of pushing up the euro even more.
Others also point out that while a weaker dollar can reduce the trade deficit, it also presents the risk of importing inflation. Import prices are becoming more expensive, accelerating inflation, which in turn can discourage consumers and slow their spending, the engine of the US economy. “You have to keep that in mind when you talk about the weaker dollar, it’s not necessarily entirely positive, it may be a bold statement, but is it wise?” Wonders Daco.
According to quantitative easing QE policy
Draghi is indeed a leader of the “doves” of the ECB, in favor of keeping a very accommodating policy as long as inflation will not seem able to meet the objective of the institution.
In the other camp, lined up behind Bundesbank boss Jens Weidmann, the “hawks” want to tighten the credit crunch faster, given the multiple signs of sustained growth in the eurozone.
Usually faint, this battle in the board of governors has filtered into the minutes (minutes) of the last meeting of the ECB in December, causing trouble on the markets.
But “the credibility of the ECB must be preserved,” said AFP Michel Martinez, Chief Economist at Société Générale, for whom Mr. Draghi should “clarify things” in front of the press from 13H30 GMT.
One thing seems certain, “the ECB will first want to finish with the QE, then pause, finally raise its rates.This sequence is engraved in the marble,” said Mr Bokobza. The whole issue of the coming months will be about the speed of execution of this plan
SOURCE : Marie Charrel, Le, AFP


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