Trump devaluation claims raise fears of global currency war

1/2/2017   

By Shawn Donnan, Robin Harding and Katie Martin

Abe and Merkel comments underscore alarm over US’s radical approach to dollar

The Trump administration’s willingness to break with tradition and comment about currency valuations has raised fears that the US might lead the world into a new round of currency wars, angering and unnerving allies.

Shinzo Abe, Japan’s prime minister, complained on Wednesday after Mr Trump attacked China and Japan for “play[ing] the devaluation market”.

In response, Mr Abe told the Japanese parliament: “The kind of criticism they are making of yen manipulation is incorrect.”

The previous day Angela Merkel, Germany’s chancellor, denied that Berlin was seeking to influence the valuation of the euro — after a top Trump adviser in an interview with the Financial Times accused Berlin of exploiting a “grossly undervalued” euro.

The administration’s comments were the latest sign of a dramatic departure from past practice that began during last year’s campaign when Mr Trump complained that a strong dollar was hurting US companies.

US presidents have long declined to comment on the value of the dollar or other currencies, instead emphasising confidence in the US currency’s strength. Traditionally, the job of addressing currency questions has been left to the treasury secretary. Since Robert Rubin in the 1990s the occupants of the post have enunciated their belief in a “strong dollar” as a reflection of US economic strength.

Stephen Mnuchin, the former Goldman Sachs banker whom Mr Trump has tapped for treasury secretary, has publicly adopted a more cautious approach than the new president. During his confirmation hearing last month he told senators that he believed the “long-term strength” of the dollar was “important”.

But the chaotic start to the administration and what many see as its protectionist agenda have amplified fears of not only currency wars but a fully fledged trade confrontation that could be disastrous for the world economy.

Economists argue that Mr Trump’s plan to boost US growth with lower taxes and infrastructure spending and a Republican proposal to impose a new border tax on imports are both likely to lead to a stronger dollar as well as a wider US trade deficit. They fear that Mr Trump could respond with more aggressive trade actions, since he is already complaining about the strength of the dollar and the trade deficit with countries such as China, Japan and Mexico.

Ulrich Leuchtmann, an analyst with Germany’s Commerzbank, warned clients to “buckle up for a currency war that might become nasty” after the euro comments by the head of Mr Trump’s new National Trade Council, Peter Navarro, shook markets. “With his statement [Mr Navarro] has in fact fired the next salvo in the currency war the US administration is currently conducting against the rest of the world,” Mr Leuchtmann said.

But Mr Trump has so far declined to move ahead with his high-profile campaign promise of officially declaring China a currency manipulator — a potentially explosive step.

“I’m waiting to see what actually happens on China policy,” said David Dollar, a former US Treasury China expert now at the Brookings Institution.

Sean Spicer, the White House spokesman, on Wednesday declined to comment on the euro or to confirm that Mr Trump agreed with Mr Navarro. He said that would be the job of Mr Mnuchin when he took office.

Many experts are also looking for greater clarity on the administration’s position when G20 finance ministers convene in March.

Most central bankers argue that currency weakness is a consequence, not a goal, of easy policy aimed at boosting inflation at home. Masatsugu Asakawa, Japan’s top currency official, said the yen’s recent movements were driven by the market and monetary policy aimed at escaping deflation. “Japan has not intervened in recent years,” he told reporters.

Japan intervened heavily in the early 2000s to weaken the yen. It did so again after the 2008 financial crisis and most recently after the 2011 earthquake and tsunami in Tohoku. But despite speculation about intervention as the yen rose to Y100 last year, Japan held back, under pressure from the Obama administration.

China has not intervened in recent years either, although several jurisdictions not mentioned by Mr Trump — such as South Korea and Taiwan — are thought to be actively managing their currencies.

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