Trump and FX: What did He Say?

<br /> Trump and FX: What did He Say? – Marc to Market<br />


US interest rates and the yen seemed to stabilize before US President Trump’s Wall Street Journal interview
was released. 
For the first time in months, Trump used
the bully pulpit to push the dollar down.  
The real broad trade-weighted dollar rose in seven of the last
eight months in 2016, including the last four months of the year. 
 It has fallen in the first three months of 2017. US
exports are up 6.7% year-over-year in February.  Exports trended lower in
2015 but recovered steadily last year and were at two-year highs in February.
Trump said the dollar was
getting so strong that it was hampering the ability of US firms to compete.
In an unusual act
of contrition, the President said that the confidence the investors have in him
was partly responsible for driving the dollar higher.   For the record,
the read broad trade-weighted measure of the dollar was lower at the end of
March than it was at the end of November.
It is not clear what course
of action the US will take, if any, to remedy the situation. 
 Treasury Secretary Mnuchin likely was not a happy
camper.   Speaking for the US,
Mnuchin agreed at the recent G20 meeting that countries ought not to seek economic advantage in the currency
market.   Trump stole much of the thunder of the upcoming Treasury report on the foreign exchange market by
acknowledging what we have been arguing for some time:  China is not
manipulating its currency. 
Some media coverage, without citing sources, said this reduced the
threat that China would sell its Treasury holdings.  
 We do not see the basis for the fear in
the first place.  Being cited a currency manipulator is more cosmetic than
substantive, though because China had not been so
deemed for more than two decades, it would be notable.  At the
first cut, being accused of manipulation requires bilateral talks, which, as we
have noted, China and the US have already agreed to hold.  If China sells Treasuries but maintains its reserve level, it is not clear what
market is deep enough to absorb those flows, and at what cost to China ( loss
of interest income,  diversification, and
While Mnuchin has stayed
clear of trade issues, Commerce Secretary Ross did not return the favor. 
Foreign exchange policy is typically the purview of the Treasury Department.  Yet, Ross suggested that the currency
misalignments may be addressed in the
comprehensive review of US trade that Commerce in the undertaking.   Misalignments can happen without manipulation
by officials and are often driven by differences
in savings and investment, cyclical considerations, including relative interest
rates, and investor asset preferences.
 It is essential that trade review draws on value-added trade data. 
President Trump made two
other revelations.
he indicated that he wants health care reform before tax reform.  He has
gone back and forth in terms of
priorities, but we have noted that the anticipated savings from health care
reform were needed to fund tax reform.
 Second, he said that the reappointment of Yellen was a possibility.
  We discussed this a couple of days
ago (here).
 It would be consistent with the
recent tradition, but we suggested it is not very likely.    On the
campaign, Trump had accused her of not raising rates to help Clinton, but in
the interview, he acknowledged he likes a low interest rate policy.  
Here too the economic
thinking is not particularly robust. 
 Low interest rates are not a policy
objective.  At some parts of the cycle and under some conditions, low
interest rates are not desirable. The proper monetary policy is one that is
appropriate for economic conditions.  Trump’s appointments to the Federal
Reserve will be faced with the central
bank’s mandated goals within reach.  They too will favor a gradual
increase in US rates.  

The news broke late in the
session, and the dollar was sold off as
one would expect. 
 It seems to be stabilizing a bit in
early Asian turnover.  The 10–year Treasury yield also stabilized at its
lowest level since mid-November.  In the short-run, the impact of the
comments is palpable, but of the various factors that drive exchange rates,
official druthers are not of material influence.  They are literally noise about the fundamentally driven


Trump and FX: What did He Say?
Trump and FX:  What did He Say?

Reviewed by Marc Chandler

April 12, 2017

Rating: 5

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