Perhaps unsatisfied with having touched off the first three-week losing streak of the year for US equities, the Trump administration is poised to toss a little more gasoline on the burgeoning dumpster fire.
In what certainly sounds like, at the least, a mini-escalation, the Commerce Department on Thursday evening said it intends to “impose countervailing duties on countries that act to undervalue their currency relative to the dollar, resulting in a subsidy to their exports.”
The announcement came from Wilbur Ross, who apparently woke up long enough to put his name on an official statement.
“This change puts foreign exporters on notice that the Department of Commerce can countervail currency subsidies that harm US industries”, Ross said.
The statement is an announcement of the initiation of proposed rule-making, whatever that means. The draft regulation sets out to identify criteria Commerce could cite to justify countervailing duties to ameliorate “currency undervaluation.”
This would allow US companies to seek relief in the form of tariffs on goods originating from countries Treasury says are engaged in competitive devaluation. On the surface anyway, this appears to mean that tariffs on top of existing duties are explicitly on the table at the discretion of the administration.
Last summer, after Trump’s opening salvo in his one-sided war of words with Jerome Powell, the president took to Twitter to make it abundantly clear that he wasn’t pleased with the extent to which hawkish Fed policy served to water down the effects of the tariffs. At the time, there were rumors that the US might actually resort to overt FX intervention. Trade wars are, to certain extent anyway, synonymous with currency wars and post-crisis monetary policy complicates things immeasurably. Simply put, nobody wants to be “out-doved”, so to speak, because the mere perception that you’re proceeding faster along the road to normalization than somebody else can trigger unwanted currency appreciation to the detriment of exports and, critically, to the detriment of your inflation-targeting efforts.
Trump’s comments about the relationship between the dollar, the Fed and trade were just another example of the president turning something that’s better left unsaid into a public debate – he has a habit of trampling on decorum by making things that should remain implicit, explicit.
The problem for Trump when it comes to the trade war and allegations of currency “manipulation” is that it’s virtually impossible to discern what’s “manipulation” and what’s just the market pricing in the assumed deleterious effects of a trade-related downturn in growth.
This was particularly vexing for the US last summer vis-à-vis the yuan and it’s also an issue with the euro. Insisting that America’s trade partners don’t cut rates in the face of economic headwinds because cutting rates might push their currencies lower against the dollar is clearly ridiculous – it amounts to Trump demanding that other countries shoot themselves in the foot just so his tariffs have the maximum possible impact.
Meanwhile, Trump’s penchant for overheating the US economy and driving up domestic equity prices makes the US a more attractive investment proposition, which is dollar positive. Making matters more absurd still is the fact that as the trade war kneecaps other economies, the relative outperformance of the US widens, which is yet another boon for the greenback. This is Trump’s “dollar insanity loop“, as we’re fond of calling it.
According to the Commerce Department, this new move isn’t intended to punish other countries for currency moves attributable to central bank actions. “In determining whether there has been government action on the exchange rate that undervalues the currency, we do not intend in the normal course to include monetary and related credit policy of an independent central bank or monetary authority”, the department claims.
The US has refrained from officially branding China a currency manipulator over the course of the trade war and you’ll recall that the now defunct draft truce would have included an FX agreement between Washington and Beijing. Although the Commerce Department will defer to Treasury when it comes to deciding if a given country is engaged in “manipulation”, it seems clear that Trump is dissatisfied with the existing setup whereby Treasury conducts a technical study that’s based on a set of objective criteria.
It sounds like the Commerce Department is about to muddy these already murky waters further. According to sources who spoke to Bloomberg, “the move to include the new currency tool has been pushed by Ross and White House trade adviser Peter Navarro since the early days of the Trump presidency [but] the issue had been lying dormant for awhile before it rose to the top of the Trump team’s trade discussion again in recent weeks.”
In other words, this is just another example of the White House ratcheting up the pressure following the breakdown of trade talks. It’s more chest-beating and will likely be greeted by markets with skepticism.
It’s at least possible that this turns out to be less dramatic than it sounds, but in the current environment, anything that smacks of an escalation will be treated as such by traders.
“[This] could be the start of a major conflict in global FX markets”, Bloomberg’s Mark Cranfield wrote Thursday evening, adding that while “details are sketchy, the risk of such a tool being used randomly against any country is something investors will need to factor into a whole range of assets.”