Just Don’t Call It A Weak Dollar Policy

Last month, Treasury Secretary Steve Mnuchin again refrained from naming China a currency manipulator.

Treasury’s report was met with scoffs from traders. Everyone knows Treasury’s opinion – based as it is on a technical study – no longer matters all that much. Or at least it doesn’t matter when it comes to preventing the President of the United States from publicly accusing other countries of manipulating their currencies.

Read more: Steve Mnuchin Declines To Name China A Currency Manipulator

Most administration officials long ago resigned themselves to the fact that, at any given time, the president might say something that directly refutes official policy. In one particularly egregious case, Trump rolled back one-day old sanctions on North Korea via tweet, forcing the White House to craft a cover story that turned out to be a lie.

More mundane examples include Larry Kudlow insisting, on March 8, that it is “just not true, just not true” (he repeated it twice in a row) that the performance of the stock market was influencing the trade discussions. Unbeknownst to Kudlow, Trump was just finishing up a characteristically ridiculous harangue on the South Lawn. Asked about stocks and the China deal, Trump, over the loud din of Marine One’s rotors, said “As soon as these trade deals are done, I think you’re going to see a very big spike [in the markets].”

So it is with the currency manipulator label which then-candidate Trump campaigned on. Candidate Trump promised, if elected, to brand China a manipulator, and he kept that promise unofficially, by alluding to it on Twitter. And yet, Treasury hasn’t officially slapped Beijing with the derisive designation, in part because doing so would derail the trade deal.

On May 23, Wilbur Ross raised quite a few eyebrows when he announced the Commerce department intends to “impose countervailing duties on countries that act to undervalue their currency relative to the dollar, resulting in a subsidy to their exports.”

That move appeared to suggest that Trump has finally grown tired of Treasury’s technical studies and would prefer more discretion when it comes to punishing trade partners for currency weakness. 

Read more: Did The Trump Administration Just Announce A Major Currency Escalation?

As relations between Washington and Beijing continue to deteriorate, Commerce’s new tool could become highly relevant, especially considering the PBoC’s “tremendous” room to ease policy.

On Saturday, while in Japan for the G20, Mnuchin attempted to downplay the importance of the new policy, which was interpreted by some as the weaponization of the FX market. “[It’s just] another important tool in the toolkit to make sure that we have fair and balanced trade”, Mnuchin told Bloomberg, in an interview, adding that the aim is to “address when a country is using their currency for competitive purposes and devalues their currency for the purposes of trade.”

That sounds innocuous, but, again, it’s really not. It opens the door for the administration, at the urging of US companies, to slap tariffs on goods shipped from countries that are deemed (by the administration, of course) to be manipulating their currencies. In a roundabout way, this is just a weak dollar policy at a time when everyone knows Trump is irked by the stubbornness of the greenback amid the trade war.

Additionally, you’d be forgiven for doubting Mnuchin’s protestations to the contrary. After all, this is the same man who, minutes after landing in Davos in January of 2018, told reporters that a weak dollar is “good for trade”. That’s self-evident, but when you’re the Treasury secretary, you don’t say it aloud, and you definitely don’t proclaim it in Davos just hours after your boss has slapped tariffs on washing machines and solar panels (Trump had just fired the opening shot in the trade war at the time).

Trump’s ongoing verbal assault against Jerome Powell and the president’s habitual references to interest rates and other nations’ monetary policies, serve a dual purpose. Implicit – and sometimes explicit – is the idea that i) America’s trade partners are manipulating their currencies with loose monetary policy, and ii) the Fed should help “correct” the situation by cutting rates.

This is another part of the Fed cut equation. Most stories about Trump’s badgering of the central bank revolve around the president’s desire to force rate cuts in the interest of turbocharging the stock market and the economy (“It would go up like a rocket”, as he put it on April 30) ahead of an election year. But Trump also wants Fed cuts in order to help cool off the greenback. The dollar’s resilience has helped other countries weather the tariff storm and, as ever, the ultimate irony is that Trump’s own fiscal policies are in part responsible for the dollar’s strength.

As the Powell Fed considers its next move, you can be sure they’re weighing the merits of a weaker dollar (e.g., the loosening of financial conditions) against the possibility that a softer currency would amount to aiding and abetting the trade war.

Ironically, the Fed also has to consider the possibility that they are making the drag from trade uncertainty worse by not cutting rates. “Global trade is clearly now being dragged into the mud by a vicious spiral of not just the actual tariff barriers and the lack of corporate visibility therein, but perhaps more importantly, the ongoing strength in US Dollar, which further undermines a global economy which is dependent upon trade and financed by US Dollar liquidity”, Nomura’s Charlie McElligott wrote late last month.

“When discussing the risk/reward of pre-emptive cuts versus Fed restraint, the comparison should be made between the Fed doing nothing and risking that political negotiation process triggers a recession, or that the Fed could get dragged into becoming a permanent part of the policy mix with all the implications that role entails”, Deutsche Bank’s Aleksandar Kocic said, in a note out Friday afternoon.

Ultimately, Trump will likely insist on engineering a weaker dollar one way or another. “If (or, more likely, when) USD/China does trade at 7, you can be sure it won’t go unnoticed by the White House”, Bloomberg’s Richard Jones wrote Friday, as the yuan weakened on the back of comments from PBoC chief Yi Gang.

“As much as the US administration has been waging war by using tariffs, don’t be surprised if [they] start trying to jawbone the USD lower too”, Jones went on to caution.

Don’t tell that to Steve Mnuchin, he doesn’t know anything about it. Pinky promise.