From mitigating the Covid-19 pandemic to tackling inequality to overarching tax policy, on top of those agendas, US Treasury Secretary Janet Yellen has another headache on her mind: tensions over currency intervention.
The dollar has fallen more than 13 per cent from its high in March last year, in part because of the historic easing by the Federal Reserve, which has injected liquidity into the financial system and brought down US borrowing costs.
While foreign policy makers initially benefited from the U.S. response to the global credit crisis, the recent appreciation of their currencies threatens to dampen their own economic recoveries. As a result, officials from Europe to Thailand to Chile have drawn up plans for sustained intervention.
Ms Yellen this month set herself apart from previous Democratic administrations by refusing to return to a “strong dollar” policy. For her, that could pose a challenge. The new Treasury secretary has just promised members of Congress that she will find ways to “put effective pressure on countries that intervene in foreign exchange markets to gain a trade advantage.”
“What we’re seeing now is just the beginning of central banks’ response to a weaker dollar environment,” said Alan Ruskin, chief international strategist at Deutsche Bank AG, who has been analyzing markets for more than 20 years. While large-scale manipulation hasn’t occurred so far, “it’s something the markets and the incoming Biden administration need to watch very closely.”
In the early stages of the last recovery from the crisis, in 2010 and 2011, similar Fed easing helped push down the dollar and stoked resentment abroad. Brazil’s finance minister at the time called the resulting tensions a “currency war”.
Ten years later, the United States has no quick and effective tools to solve the problem. The US Treasury’s semi-annual currency report, which puts countries on a watch list and labels them as currency manipulators, has proved ineffective.
Switzerland and India have completely ignored the US and continue to take active action. The US Treasury in December publicly accused both countries of intervening in currency markets.
On December 16, after the US Treasury designated Switzerland a currency manipulator, the SNB said it did not engage in “any form” of currency manipulation and that its actions were designed to help ensure price stability.
The Treasury report was “unreliable,” says Marc Sumerlin, founder of Evenflow Macro and a former White House economic official in the George W. Bush administration. “The report was not meant to have much impact — it was always a shameful document — but because it was politicized, it lost even the shameful element.”
In August 2019, former Treasury Secretary Steven Mnuchin named China as a currency manipulator, just as fears grew that the report had been politicized as President Donald Trump escalated pressure on China to strike a trade deal. Mnuchin removed China from the list before signing the trade agreement in January 2020. Mr. Mnuchin and Mr. Trump have also repeatedly championed, and even pushed, a weaker dollar.
Ms Yellen did not reiterate their stance on the dollar when she spoke to the Senate Finance Committee last week. But when asked if she supported a strong dollar, she said she believed in “market-determined exchange rates” and that the United States “does not seek a depreciating currency.”
Sumerlin says that’s like saying, “The dollar can depreciate if it wants to, and I’m not going to put my fingerprints on it.”
This made no difference to foreign policy makers, who in the pre-Trump era emphasized the official US “strong dollar” stance when there was an unnecessary appreciation of their own currencies. Now they must choose whether to allow appreciation that undermines the competitiveness of their economies or to reflate; Whether to make verbal appeals or to intervene.
More recently, the European Central Bank has also signaled that it has the tools it needs, including interest rate cuts, to prevent a stronger euro from undermining its inflation goal. Officials in economies such as China, Taiwan and Thailand have described their currency sales as smoothing, not manipulation.
When asked about moves by other countries to sell their currencies, a Treasury Department spokesman pointed to Ms. Yellen’s remarks before the Senate Finance Committee.
President “against the value of foreign currency manipulation to gain an unfair advantage of American workers,” yellen told lawmakers, “biden – Harris government will study the Ministry of Finance, the Ministry of Commerce and the United States trade representative’s office how to work together, to intervene in currency markets to gain a trade advantage of effective pressure state.”
But she also said that while bilateral deficits could be an indicator of unfair trade practices, the figures “must be understood in the overall context of our trade relationship with each country, not as a blanket measure”.
It remains to be seen how patient U.S. lawmakers will be if other countries step up their involvement.
Zach Pandl, co-head of global currency and emerging markets strategy at Goldman Sachs Group Inc., said the key is to watch what China does, given the huge U.S. trade deficit with China.
“There are other countries that are also concerned about their own currency manipulation,” Pandl said. “But the key to their policies is China.”