One of the defining characteristics of the interplay between the Trump administration and markets is the tendency for “unlikely” scenarios to gradually become the base case over time.
This happened with the trade war. This time last summer, the prospect of Trump slapping tariffs on the entirety of Chinese imports seemed implausible. Fast forward a year and the only thing that averted that outcome was an eleventh-hour handshake “truce” in Osaka. Most desks still see tariffs on the remainder of Chinese goods as likely.
The same thing is true of Trump’s attacks on the Fed. After Trump’s landmark July 2018 interview with Joe Kernen, during which the president first criticized Jerome Powell, pundits and analysts variously suggested that the prospect of Trump removing his Fed chair was far-fetched in the extreme. Fast forward a year and the White House counsel has explored options for demoting Powell, while Jay’s colleagues are publicly lobbying for his job.
Read more: Jim Bullard Says He Wants Jay Powell’s Job
And so it is with the FX intervention story. Following Trump’s inaugural “I’m not happy with Powell” interview a year ago, the president delivered a series of tweets which suggested he understood the nexus between monetary policy divergence, currencies and the trade war all too well. In short, Trump sounded like he was itching for a currency war, fanning concerns that he might resort to outright FX intervention.
At the time, analysts called his tweets “dangerous“, “excessive” and “aggressive”, but now, it’s just par for Bedminster – we’re all accustomed to Trump’s currency balderdash. But the frequency of the president’s FX tweets has picked up lately, and his explicit mention of “Mario D.” forced analysts to reassess the odds of outright intervention by Steve Mnuchin.
Over the past three weeks, speculation has gone into overdrive.
Read more on the FX intervention threat and the looming currency war
On Thursday, Steve Mnuchin delivered a series of remarks in an interview with Bloomberg that suggested the US is, in fact, pondering intervention.
There’s no change in the administration’s dollar policy “as of now”, Mnuchin said, from Chantilly, France, following the G7 finance ministers’ meeting.
He could have just left it at that. After all, “as of now” means the door is open and he wouldn’t have put it that way if intervention hadn’t been discussed. But he continued, noting that “this is something we could consider in the future”.
For most analysts, this raised the odds of intervention and, indeed, you don’t have to be an analyst to come to that conclusion. “FX intervention risk was lifted another notch” by Mnuchin, Scotiabank FX strategist Shaun Osborne remarked late this week.
Barclays Juan Prada agreed, and told Bloomberg as much in an e-mail. One of Prada’s colleagues at the bank weighed in on Friday with a bit of color which largely underscores what most other analysts have said – namely that intervention isn’t likely to work.
“President Trump’s apparent frustration with the ‘strong dollar’ and his rapid reaction on Twitter (‘unfair’) at the mere suggestion of fresh ECB stimulus in Draghi’s Sintra speech, has fueled speculation that if the Fed’s insurance cuts were not sufficient to weaken the dollar, the US Treasury could unilaterally intervene in the FX market”, Barclays’ Christian Keller writes, adding that “compared to the daily FX market volumes, the Treasury’s capacity is very limited, and in cases when official FX intervention did reverse USD valuation trends, it was coordinated multilateral action that did the trick (eg, the Plaza accord in 1985)”.
That latter point is one Deutsche Bank discussed at length earlier this month.
Of course, the standard line from the US is that a strong dollar is in the country’s best interest. Mnuchin failed to endorse that view during a press conference this week. “I’m not going to make any specific comments on the dollar policy or the euro-dollar policy”, he said.
Whether or not intervention by Trump would be effective, it would likely stir up markets and create some excitement, especially given what it would seemingly telegraph about the future of the administration’s foreign policy. As Barclays put it on Friday, “a unilateral move by the US could still create some FX volatility, signaling that next to trade, technology, and taxation, another element of policy uncertainty has been added”.