Washington Insider -- Friday

US a Currency Manipulator?

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

USDA's Perdue Says Farmer Aid Package Details Coming Monday

The expected Friday release of details of the farmer aid package has been pushed to Monday, according to USDA Secretary Sonny Perdue.

The rule covering USDA plans to make the aid payments and take other actions to help farmers impacted by trade actions is still under review at the Office of Management and Budget (OMB).

"Those details are going to be out Monday," Perdue stated.

As for the specific amounts of aid, Perdue would not comment on reports that the payments to soybean farmers would be $1.65 per bushel and one cent per bushel for corn. "We will acknowledge that dairy and pork and soybeans will be the commodities that are most dramatically affected by the tariffs," Perdue stated. "It's not going to make everybody whole. It's not going to make everybody happy. It's not going to seem like it's equitable."

US-China Talks End with No Major Breakthrough

Chinese leader Xi Jinping and his trade officials are not budging after two days of trade policy talks that ended Thursday in Washington.

A Trump administration official acknowledged that President Trump and his team have repeatedly laid out for Chinese officials the changes in behavior they would like to see. “But so far,” the official said, “we have yet to see those.”

Negotiators made no real progress at the two-day meeting, although Beijing described the talks as “constructive and frank" and said the two sides would stay in contact about the next steps.

A fresh round of U.S. tariffs on $16 billion of Chinese imports went into effect on Thursday, and Beijing retaliated with tariffs on $16 billion of American imports.


Washington Insider: US a Currency Manipulator?

Although charges of currency manipulation are most often made against developing countries—and used to browbeat China — some Wall Street observers are saying that the President’s “sustained campaign” to weaken the dollar as a way to reduce the U.S. trade deficit “can’t be dismissed,” Bloomberg reports.

“The trade debate will increasingly include the currency issues,” said Charles Dallara, a former U.S. Treasury official and one of the architects of the Plaza Accord, the 1985 watershed agreement between the U.S. and four other countries to jointly depreciate the dollar. “It’s inevitable.”

Granted, Dallara didn’t specifically use the word manipulation, Bloomberg said. There’s something of a reluctance among analysts to associate the U.S., the standard-bearer for free-market principles, with the term. They prefer to refer to it as foreign-exchange intervention. Semantics aside, a shift to a more protectionist and interventionist policy, a la 1985, would not only reverberate across the $5.1 trillion-a-day currency market and undermine the dollar’s status as the world’s reserve currency, but could also weaken demand for U.S. assets.

Since falling toward a three-year low in April, the dollar has appreciated almost 6%, according to the Bloomberg Dollar Spot Index. Its advance last quarter was the strongest since 2016, as it appreciated against all 16 major currencies. The dollar is also 11% above its average over the 13-year span of the dollar index.

A strong-dollar policy has been a cornerstone for successive U.S. administrations. The U.S. was also a key supporter of the July Group-of-20 pact that member economies will “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.”

Yet like many other things, this administration “has shown a penchant for upending the status quo,” Bloomberg said.

After a flurry of recent tweets in which President Trump complained that the dollar is blunting America’s “competitive edge,” Michael Feroli, JPMorgan Chase’s chief U.S. economist, wrote that he can’t rule out the possibility the administration will intervene in the currency markets to weaken the greenback. Both Deutsche Bank and OppenheimerFunds echoed the view, saying dollar intervention was no longer far-fetched. For example, the President recently complained to wealthy Republican donors that he was “not thrilled” with the Federal Reserve’s interest-rate increases under Chairman Jerome Powell, which have boosted the dollar.

So what tools does the administration have if it intended to go beyond mere talk? The President could order the U.S. Treasury to sell dollars and buy currencies using its Exchange Stabilization Fund, according to Viraj Patel, an FX strategist at ING. But because the fund only holds $22 billion of dollar assets, the impact would likely be minimal. Any direct intervention that is larger and more ambitious in scope would also require congressional approval, he said.

However, Patel says there is a loophole the President could exploit to get around the fund’s constraints and bypass Congress altogether: he could declare FX intervention a “national emergency,” and then force the Fed to use its own account to sell dollars.

Such a move would be a long shot by any stretch of the imagination, but since the President has invoked “national security” to impose tariffs, Patel says he can’t “completely rule out” the possibility.

There are plenty of caveats, Bloomberg says, and the odds of any kind of U.S. intervention are still low. At the G-20 summit, Treasury Secretary Steven Mnuchin assured fellow finance ministers the U.S. wouldn’t meddle in foreign-exchange markets. And while White House trade adviser Peter Navarro has broached the subject of a global accord on currencies in the past, the chances of a multilateral agreement on the dollar are remote. Plus, there’s always the threat of retaliation by other nations if the U.S. goes it alone.

Nevertheless, many who recall the events in the early 1980s that culminated in the Plaza Accord see certain parallels to what’s happening today. Then, as now, the dollar’s strength on the back of rising interest rates was at the center of trade tensions between the U.S. and other major economies. Protectionism was on the rise, as were fears of foreign imports costing American jobs. Then, the bogeyman was Japan. Today, it’s China.

And as the trade war with China intensifies, some worry about the recent precipitous drop of the yuan. It has tumbled 9% since April, when trade friction with China started to intensify. The magnitude of the decline, by some measures the fastest since the 1994 devaluation, boosted speculation the People’s Bank of China is deliberately weakening the yuan to offset the tariff impact.

And, while there is plenty of criticism from administration officials, Bloomberg emphasized that the Treasury Department, conducts twice-yearly reviews of international foreign-exchange policies and, in April declined to formally name China a currency manipulator based on its own criteria.

However, Bloomberg says that bankers have long memories that many recall how in the early 1980s the Fed’s quantitative easing sowed frustrations in emerging markets over what some officials saw as a means to manufacture a weaker dollar. Whatever the case, Dallara is bracing for more turbulent times.

He says he has “lived through a lot of market gyrations in my career, and I have an uneasy feeling that I can’t validate by data that tensions are going to, at some point, emerge into volatile market dynamics. This is a risk,” he told Bloomberg.

So, currency policies and trends are yet another factor that producers should watch closely as the political season approaches, especially if the trade wars escalate to the point that they become major threats in the fall elections, Washington Insider believes.

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