14. August 2019, 11:11 Uhr
The US dollar is standing tall, stubbornly refusing to do Donald Trump’s bidding. In his efforts to shrink the US’ trade deficit, the President has an intelligible interest in checking the greenback’s strength. And we think he will not refrain from the ultimate instrument to achieve this end: direct intervention by the Treasury on foreign exchange markets.
By now, Donald Trump has proved his intractable determination to get the better of China in the current trade dispute, even overriding the explicit advice by his counsels not to escalate the tariffs battle any further. And although yesterday’s announcement of partial exceptions to as well as a general deferring of the latest round of tariffs on Chinese goods has come as a relief to the latter, markets and businesses should not mistake it for a general change of mood in the White House.
The President has realised that, ultimately, his efforts to reduce the bilateral trade deficit with China will be in vain if a concomitant devaluation of the Yuan countervails these efforts. China, in turn, has made it clear that it will not fend off a weakening Yuan „determined by markets”, while the Fed ‘refuses’ to follow Trump’s wishes.
Thus, the labelling of China as a currency manipulator was but the first step, the necessary condition enabling the President to ‘retaliate in kind’ (from his point of view). In a perverse way, yesterday’s de-escalation of sorts probably even makes this retaliation more likely: Since Trump was evidently forced to accept that some of his intended new tariffs would hit his standing with US consumers hard (and untimely so in the run-up to the election next year), he will be bent on turning the screws on China another way. How very handy, then, that direct intervention on foreign exchange markets is an exclusively executive act by the Treasury at the say-so of the President.
With the new tariffs not kicking in before December, time is running out to achieve a deal in time to maximise political capital for next year (see related post), with a currency intervention the only means left at the President’s disposal. Hence, we expect the US to announce such intervention in the weeks ahead, if only to demonstrate its grit to the Chinese side lest the latter does not confuse today’s relaxation with a softening of the US position. The trade spat is far from over and is going to become uglier before it might be resolved one day.