Jane Foley, Senior FX Strategist at Rabobank, suggests that on the back of this week’s remarks made by President Trump regarding exchange rates, the market is currently concerned that the US Treasury could be about to change tack.
Key Quotes
“In the US it is the Treasury, rather than the Federal Reserve, that is in charge of dollar policy. For years the US treasury endorsed a strong USD policy.”
“In the US it is Treasury that would order any intervention in the FX market. Trump has already involved himself in verbal interventions and the market is currently debating whether this could extend to a deliberate attempt by the government to hold down the value of the USD.”
“In the short term this could support Trump’s aims of rebalancing the US trade deficit. In the long-term, however, this could weaken investment flows and increase the inflation potential of the US economy.”
“In September 2010 Japan’s Ministry of Finance intervened for the first time in six years to weaken the value of the JPY.”
“There has been no FX intervention by the G7 since then and most G7 officials carefully tip-toe around and direct mention of currency markets. Trump, however, is a disruptive influence.”
“In April 2017 Trump stated in an interview with the Wall St Journal that the USD was “getting too strong”. At this stage he backed away from calling China a currency manipulator and the power of his words was offset a few days later by a denial by US Treasury Secretary Mnuchin that Trump was trying to talk down the USD.”
“Trump was far more candid earlier this week when he used an interview with Reuters to say “I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also”.”
“The USD dropped, not because there was broad agreement with these accusations – far from it, but because of the inference that Trump could be laying the groundwork for the US Treasury to take its own action in the FX market. Although this would be inconceivable in recent years, the tide has turned.”
“It is our central view that the USD will continue to gain ground on a broad basis until the summer of next year on favourable interest rate differentials and outflows from emerging markets. This view, however, assumes there will be no deliberate shift by the US Treasury to weaken the USD.”
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