Donald Trump needs help from one of his favorite punching bags, the Federal Reserve, if he truly wants to take action to weaken the dollar.
The president has repeatedly brought up the idea of late. He tweeted this month that Europe and China are playing a “big currency manipulation game” and called on the U.S. to “MATCH, or continue being the dummies.” He’s made noise behind the scenes, too, lamenting to job candidates for the Fed board that the dollar’s strength could blunt economic growth.
Administration officials believe that for any move on the dollar to succeed, the Fed must agree with the policy and clearly communicate its support, according to people familiar with the matter. The Treasury Department and Fed have coordinated the last three U.S. currency interventions, splitting the amount transacted evenly between them in 1998, 2000 and 2011 in order to nudge the dollar’s value.
But even if the president prods the Treasury to sell dollars to drive the greenback’s price down, the Fed is largely independent and there’s no guarantee it would move in lockstep.
The Treasury holds about $94 billion it could use to try to impact currency markets -- a relatively small sum considering foreign exchange is a more than $5-trillion-a-day business. The Fed’s support would double the impact, assuming the two organizations again shared the cost 50-50. But if the Fed stayed on the sidelines, that would weaken the signal sent to markets, said PGIM Fixed Income chief economist Nathan Sheets.
“Not having the Fed on board would undermine the credibility of the intervention,” said Sheets, a Treasury official during Barack Obama’s presidency. “Fed involvement would bring a technical endorsement, and strengthen the case that the move is justified by fundamentals.”
White House spokesmen didn’t respond to a request for comment and a Fed spokesman declined to comment.
A strong dollar gives U.S. consumers more money to buy imports while hurting exporters, widening trade deficits Trump’s vowed to close. While Trump has recently asked candidates for two open seats on the Fed’s board of governors about their views on the dollar, he hasn’t directed Treasury Secretary Steven Mnuchin to intervene, Bloomberg News reported last week.
The president’s top economic adviser, Larry Kudlow, and Mnuchin both oppose any U.S. effort to weaken the dollar, according to people familiar with the matter. The people asked not to be identified discussing internal administration deliberations.
Trump has grown concerned that the currency’s strength will undermine the economy’s performance ahead of his 2020 re-election, which has also fueled his criticism of the Fed. The central bank’s trade-weighted measure of the greenback isn’t far below the strongest level since 2002, underscoring the competitive headwinds American exports face.
The U.S. last intervened in FX markets in 2011, when it stepped in along with other nations after the yen soared in the wake of a devastating earthquake in Japan. That effort buoyed the dollar. Now, however, a growing chorus of Wall Street analysts are warning that the U.S. could act to forcibly weaken the dollar -- a step not taken since 2000.
Unilateral intervention would contradict a longstanding commitment that the U.S. reaffirmed last month, along with other members of the Group of 20, that actively weakening exchange rates in order to boost exports is in no one’s interest. Mnuchin is in France this week for the annual meeting of the Group of Seven finance ministers.
If Trump orders Mnuchin to intervene, it’s unlikely that the Fed would follow Treasury’s lead, said Mark Sobel, who used to manage the Treasury’s Exchange Stabilization Fund, the pool of money the U.S. government would use. U.S. intervention traditionally takes place to address “disorderly conditions,” not concerns about foreign-exchange levels, said Sobel, now U.S. chairman of the Official Monetary and Financial Institutions Forum.
“The Fed has to make its own, independent decision” based on evidence of “market dysfunction or major market implications,” he said. “Fed non-participation could send a divisive signal to markets, exacerbating, not reducing, volatility.”
Not everyone is convinced the Fed would stay out of the intervention. Goldman Sachs Group Inc. expects that the central bank would heed Treasury’s decision, since Chairman Jerome Powell stated last month that the Treasury is responsible for the country’s exchange rate policy, “full stop.”
“It is far from clear that the Fed would not participate,” Goldman strategist Michael Cahill wrote in a July 11 note. “The Fed would probably defer to the Treasury and go along, even if it does not agree.”
Foreign-exchange traders have yet to price in the possibility of U.S. intervention, let alone a standoff between the Treasury and the Fed: global currency volatility is hovering near a five-year low. But analysts caution that further monetary stimulus from the European Central Bank could draw Trump’s ire and raise the risk of intervention.
The Fed would likely seek to chart a middle ground should such a situation arise, Sheets said. While the basis for intervention is not compelling, he said, the central bank runs the risk of drawing “intensified political fire” should it stay on the sidelines.
“Proposed FX intervention would put the Fed in a really difficult place,” Sheets said. “One approach would be to let the Treasury go alone, but for the chairman, in parallel, to provide supportive commentary, emphasizing that Treasury takes the lead on currency policy.”
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