U.S. AGGRESSION ON THE DOLLAR WILL PROVE COSTLY / THE FINANCIAL TIMES

US aggression on the dollar will prove costly

By: Guest writer


In this guest post, former veteran Treasury official Mark Sobel and now US Chair of OMFIF, a think-tank, argues that the US administration’s penchant for weaponising currency markets will hurt both itself and the international monetary system.

If “weaponising” trade and financial sanctions did not suffice, the Trump Administration is stepping up its aggression on the dollar and foreign exchange markets. Indeed, it is even seeking to institutionalise this aggression in US foreign exchange policy. The Administration’s mistaken approach will hurt America and weaken the international monetary system.

Casting aside a two decades-long policy of a “strong dollar” and limiting comments on foreign exchange markets, this Administration is now engaged in spurious open-mouth operations about key foreign currencies. Harmful currency practices should absolutely be tackled. But the Administration discounts that currency weakness can legitimately reflect market forces, and instead acts as if major currency weakness constitutes a harmful currency practice.

Take the President’s criticism of ECB President Mario Draghi and his signal for greater euro-area monetary accommodation in June. Draghi’s reasons for doing so were crystal clear — euro-area economic activity is weak and the ECB’s inflation objective is persistently undershot.

More accommodation is fully consistent with the ECB’s mandate, even if a weaker euro results.

At the recent Fukuoka G20 Finance Ministerial, US Treasury secretary Steven Mnuchin reportedly observed that markets were accustomed to Chinese intervention to support its currency, and suggested that a lack of such intervention could signal an intentional desire to weaken the renminbi.

The Administration apparently wants China to prevent any depreciation below Rmb7 per dollar, even if a weaker currency reflects market forces. Higher US tariffs on China weaken Beijing’s competitiveness and hit the renminbi. China would have little reason now to tighten monetary policy to defend its currency given a slowing economy due in part to the US-China trade war.

In the land of the blind, the one-eyed man is king.

The Administration seems to ignore that despite manifold US economic problems, there may be good reasons for dollar firmness. Better US growth performance favours investment stateside relative to an anaemic Europe and Japan. Higher official interest rates, reflecting America’s outperformance, have coupled with an ill-advised procyclical deficit-busting US fiscal policy to support dollar demand. Contrary to longstanding G20 foreign exchange commitments — largely written by the US — the Administration seemingly wants a competitive dollar depreciation, or a non-competitive appreciation of other currencies.

To help achieve this, the Treasury has unsoundly tightened its criteria for assessing possible currency “manipulation” in its latest “Foreign Exchange Report”.

Treasury fairly widened the net of “major trading partners” eligible for examination to spotlight large current account surpluses in many ASEAN countries. But Treasury also cut the current account surplus threshold for triggering closer scrutiny from 3 to 2 per cent of GDP. This is too low a threshold and will now pick up a cacophony of countries.

Such a threshold neglects that there may be valid structural or cyclical reasons why some countries run modest surpluses. The latest Treasury report also doubles down on bilateral balances as a means of training its sights on China, even though China’s current account surplus is small and disappearing. Moreover, the Peoples’ Bank has not been intervening to weaken its currency.

Another tool the Administration is using is to aggressively associate currency provisions with trade deals — a process begun under the Obama Administration.

The US trade deal with Mexico and Canada (USMCA) includes certain currency provisions inside the agreement, marking the first time foreign exchange policy commitments would be legally enforceable under dispute resolution in a trade deal. While this may not be practically meaningful (as the North American currencies float), it sets an important precedent for future deals. Further, the US-China trade deal under discussion months ago included a currency chapter.

Lastly, the Commerce Department just proposed — with the Administration’s blessing — a regulation that would make currency “undervaluation” a countervailable subsidy, meaning the country in question is providing “unfair” financial assistance to the benefit of its export sector.

Almost all trade experts and lawyers argue this would fly in the face of WTO rules. What is more, there is no precise way to measure undervaluation. Monetary policy heavily influences exchange rate movements, and it should be directed at fostering maximum employment and price stability, not a given trade balance, as the G-7 and G-20 have agreed. Monetary policy is in the Fed’s wheelhouse. It has nothing to do with Commerce’s remit.

If the United States is to determine the equilibrium dollar-renminbi exchange rate, that rate will depend on whether the US believes the desired bilateral balance is several hundred billion dollars or zero. Yet the vast bulk of economists dismiss the relevance of bilateral balances. If one currency’s undervaluation is the flip side of dollar strength and overvaluation due to US policy or performance, should the undervalued currency be sanctioned?

The Administration is right to highlight legitimate harmful currency practices. But the Administration is misguided in its penchant to blame foreigners’ currency practices first and simply assume they are the sinners.

Rather, it should first look in the mirror at itself and its own policies. That penchant runs the risk of causing a flare-up in beggar-thy-neighbour protectionist behaviour. This will not benefit America. The international monetary system will be weaker if the US adds unnecessary currency conflicts to its trade wars, unwarranted unilateralism on financial sanctions, and disregard for international institutions.