Unlikely that White House Actively Devaluates Dollar

Wall Street analysts say it is increasingly possible the Trump administration will try using a stronger weapon in the currency wars than just presidential tweets and rhetoric about unfair foreign central banks and currency manipulation.

Analysts now say there is a chance, albeit slim, that the Trump administration could ‘intervene’ to weaken the dollar, which means the U.S. government would actually sell dollars and buy other currencies. But what they see as more likely is the U.S. will verbally abandon the long-standing strong dollar policy, in an effort to level what it sees as an uneven playing field with countries, like China, harming U.S. exporters with a weaker currency.

President Donald Trump has been complaining more frequently about the dollar and currency manipulation. For instance, on July 3, he tweeted that China and Europe have made policy moves to cheapen their currencies to compete with the U.S. and perhaps the U.S. should “match” the actions. He has also repeatedly criticized Fed policies, and he blasted European Central Bank President Mario Draghi last month for opening the door to more easing policy, which sent the euro lower.

Pimco’s Joachim Fels, in a note Monday, said the president and other administration officials have been more explicit about their interest in a weaker dollar, implying the U.S. could intervene in the market.

usdcad Canadian dollar graph, July 15, 2019

“Following a pause since early 2018, the cold currency war that has been waging between the world’s major trading blocs for more than five years has been flaring up again. Moreover, even an escalation to a full-blown currency war with direct intervention by the U.S. and other major governments/central banks to weaken their currencies, while not a near-term probability, can no longer be ruled out,” wrote Fels, Pimco global economic advisor.

While market speculation has been rising about an intervention, the dollar ironically could be in for a period of decline, in part because the Fed has moved to an easing policy and is expected to cut interest rates.

Marc Chandler, chief market strategist at Bannockburn Global Forex, said dollar volatility is at a multi-year low, and the dollar has been in a fairly narrow range. The broad trade-weighted dollar, a measure of the currency against a broad group of trading partners, has been falling.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza