(Bloomberg) -- With the U.S. waging a trade war on several fronts, economists are starting to take seriously the idea that President Donald Trump could act on his preference for a weak dollar.
“While not our base case scenario, we cannot rule out a turn toward a more interventionist currency policy, particularly since the current administration has, at times, hinted at a preference for dollar weakness or objected to perceived Chinese currency manipulation,” Michael Feroli, JPMorgan Chase & Co (NYSE:JPM).’s chief U.S. economist, said in a research note this week.
In a Twitter flurry last month, Trump accused China and the euro area of manipulating their currencies, and complained that a rising dollar is blunting America’s “competitive edge.” In a reference to interest-rate hikes by the Federal Reserve, the president said “tightening now hurts all that we have done.”
The U.S. hasn’t intervened in markets to sell the dollar since 2000 when it united with fellow members of the Group of Seven in an effort to boost the sliding euro. It last bought greenbacks in 2011 as part of an international bid to stop the yen from surging after an earthquake and tsunami in Japan led locals to repatriate cash.
But analysts are awakening to the reality that Trump may follow through on his jawboning, with potential implications for the independence of the Fed.
“We believe the Fed would fall in line and play their usual role of following Treasury’s lead on dollar policy,” Feroli said. However, he noted that currency intervention would likely have no effect on monetary policy, since the central bank would likely “sterilize” the transactions by purchasing an offsetting amount of U.S. securities at home, thus leaving the monetary base unchanged.
Any attempt to massage the dollar’s value in markets would risk undermining Trump’s argument last month that China has been manipulating its currency. The U.S. has long championed a Group of 20 pact that member economies will “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.”
If China takes the lead in a currency war, letting the value of the yuan fall, it could have a deflationary impact around the world, since a stronger dollar would tighten global liquidity, Oxford Economics said in a note this week.
For now, the People’s Bank of China is suggesting it won’t support a steep drop in the yuan, with the central bank intervening last week to support the currency, after it slid to its lowest level in more than a year.
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