Donald Trump is treading dangerously close to formal dollar intervention and no one is quite sure what the implications would be.
That’s the general message from a Bloomberg piece dated Wednesday. According to Saleha Mohsin and Jennifer Jacobs, the president brought up the dollar in interviews with his latest Fed picks Chris Waller and Judy Shelton, both of whom are expected to support lower rates, despite making for a rather odd couple otherwise.
Specifically, Trump is said to have fretted to Wallen and Shelton about the prospect of a stronger dollar weighing on the domestic economy and thereby hurting his reelection bid. Larry Kudlow and Steve Mnuchin are said to be opposed to direct intervention.
As a reminder, chatter about formal intervention to weaken the greenback got louder last August following Trump’s first attacks on Jerome Powell during his landmark interview with CNBC’s Joe Kernen. After the interview, the president took to Twitter to lament what he called currency “manipulation” from Europe and China. “The US is raising rates while the dollar gets stronger with each passing day taking away our big competitive edge”, Trump said on July 20. “As usual, not a level playing field”.
Later that day, analysts called Trump’s tweets “excessive”, “direct” and “aggressive”.
Over the next month, banks began to ponder the possibility of formal intervention. An August note from JPMorgan’s Michael Feroli received a lot of attention, for instance. We covered it pretty extensively in “Presenting, The Dollar Intervention Delusion“.
Since then, talk of actual FX intervention by the US has died down, and last week, we explained why. To wit, from “As Trump Threatens To Enter ‘Currency Manipulation Game’, Here’s How FX Intervention Works“:
… primarily because Trump’s incessant bullying of Powell and the uncertainty created by the trade war have together convinced the Fed of the need to lean dovish and, in all likelihood, cut rates. The assumption is that between a decelerating US economy, plunging yields and Fed cuts, the dollar will finally crack under pressure, placating Trump.
Bloomberg reiterates that on Wednesday. “Trump has placed blame for the strong dollar squarely on Powell. White House officials say the dollar is too strong because the Fed has kept rates too high, which is why Trump expects the Fed — and not Mnuchin — to weaken the greenback”, Mohsin and Jacobs write.
But, as we said a week ago, there is no guarantee that a dovish Fed will do the trick. Indeed, plunging real rates in 2019 haven’t done much to take the wind out of the dollar’s sails, although that might not be a completely accurate characterization of the greenback, given it’s basically traded sideways.
The “problem” here is that the FOMC’s global counterparts have pivoted dovish too, and because Trump’s MAGA economy is still the “cleanest dirty shirt”, the Fed’s inclination to rate cuts hasn’t brought about much in the way of precipitous dollar weakness.
“So far, the White House has exerted indirect pressure on the dollar via the need for Fed easing”, ING wrote earlier this month. “If the dollar doesn’t start to fall later in the year, we suspect pressure will grow for the Treasury to take more direct action”.
Trump is of course aware that other central banks are inclined to cut rates and ease policy. Indeed, his already infamous “Mario D.” tweets following the ECB chief’s “whatever it takes” 2.0 moment in Sintra are a big reason why everyone is suddenly pondering the possibility of formal intervention by Mnuchin. Trump followed up last week with another round of “MATCH” exhortations.
As BofA wrote last month, verbal intervention from Trump is getting less effective over time.
If he can’t jawbone the greenback weaker and if Fed cuts don’t do the trick, it’s not out of the question that he’ll instruct Mnuchin to take action. In fact, some are now openly discussing “tinfoil hat” ideas. Given the limited firepower of the ESF (see below), CIBC actually went so far as to suggest recently that Trump might ask Mnuchin to compel the Fed to liquidate its balance sheet to boost the ammo. That isn’t CIBC’s base case, but they do note it “could create a lasting downward effect on USD valuation, given the incredible size of the Fed’s balance sheet”.
As ever, this whole thing is something of an insanity loop for Trump. His fiscal policies are responsible for keeping the US economy immune (until recently anyway) from weakness abroad, and that external weakness is in no small part a function of the trade war. In other words, he’s creating the conditions for dollar strength and then commanding the Fed to offset it while lambasting foreign central banks for protecting the interests of their own economies. It’s narcissistic to the point of absurdity, but consider the source.
The next step is probably for Mnuchin to try and talk the dollar lower, something he accidentally did in Davos early last year, prompting much tomato throwing.
The ultimate irony is that the whole thing could backfire in spectacular fashion, especially if the effort is too successful. “If the fall in the greenback’s value became disorderly, intensifying inflationary pressures might force the central bank to raise rates faster than either Powell or Trump would like”, Bloomberg correctly notes, adding that “should long-term bond yields rise as well, the economy could potentially slow, raising costs to finance the nation’s ballooning budget deficits”.
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