Mnuchin Currency Remark Seen Raising Risk of FX Intervention

Editors note: CPA’s work on currency is gaining steam. Exchange rates are, as we advocate, the next front in the trade skirmish.

Foreign-exchange strategists say the risk of a U.S. move to weaken the dollar has risen after Treasury Secretary Steven Mnuchin said there’s no change in the nation’s currency policy “as of now.”

[Alyce Andres | July 18, 2019 | Bloomberg]

“This is something we could consider in the future but as of now there’s no change to the dollar policy,” he said in an interview Thursday following a Group-of-Seven finance ministers’ meeting in Chantilly, France.

In the eyes of Shaun Osborne at Scotiabank and Juan Prada at Barclays, the remarks left the door open to action in the foreign-exchange market. The possibility has drawn the attention of Wall Street analysts as President Donald Trump has intensified his criticism of the Fed and other countries’ currency practices. He hinted at intervention in a tweet July 3, saying Europe and China are playing a “big currency manipulation game,” and said the U.S. should “MATCH, or continue being the dummies.”

“FX intervention risk was lifted another notch” by the Mnuchin comments, said Osborne, chief foreign-exchange strategist at Scotiabank. “The dollar is clearly on the White House radar and slower U.S. growth, no progress on trade into 2020 could prompt a more explicit U.S. split” from the consensus among its international peers not to intervene in FX, he said.

‘Room for Removal’

The U.S. hasn’t acted to forcibly weaken the dollar since 2000. For Bank of America Corp., ditching the strong dollar policy would be more effective than intervention. The phrase was introduced under then-Treasury Secretary Robert Rubin in 1995 as a way to lift international demand for American debt by committing not to devalue the greenback.

Brad Bechtel, head of foreign exchange at Jefferies, said the Mnuchin comments “created room for removal of the strong dollar policy.”

Mnuchin, when asked during a press briefing if he believes that a strong dollar is in the nation’s best interest, said: “I’m not going to make any specific comments on the dollar policy or the euro-dollar policy.”

Here’s what currency strategists have to say after the remarks, with the dollar not far from its strongest since 2002 as measured by a Fed trade-weighted measure:

  • Bipan Rai, North American foreign-exchange strategist at CIBC, via email:
    • The “risk of intervention over the coming year is higher than normal,” and the “as of now” qualifier “won’t help assuage any concern.”
  • Sebastien Galy, a senior macro strategist at Nordea Investment Funds, in a report:
    • “The U.S. is keeping its options opened for a possible currency intervention,” as a “potent threat to the BOJ and ECB to stop them from choosing more negative interest rates”
  • Prada at Barclays, via email:
    • The chances of U.S. dollar intervention “have increased” but more on the back of Trump’s ongoing pressure toward a weaker dollar
  • John Velis, FX and macro strategist at Bank of New York Mellon, via email:
    • “More telling was his refusal to comment when asked if he felt a strong dollar is in the national interest,” which has been an “almost reflexive assertion by U.S. Treasury secretaries going back to the early Clinton administration.”
    • While omitting that longstanding view doesn’t necessarily increase the odds of intervention, “it does underscore mixed signals on dollar policy coming from the administration.”

That’s not to say strategists expect U.S. intervention would produce the intended result.

  • Georgette Boele, a strategist at ABN Amro, in a report:
    • Unilateral intervention to weaken the dollar by the U.S. authorities “is unlikely,” and she called into question its general effectiveness. Still “given the erratic moves of the administration it is not something we would dismiss outright,” she said.
  • More likely, according to Scotiabank’s Osborne, is that Trump continues with “verbal intervention” and the Fed continues to message policy accommodation, allowing the greenback to “slip back of its own accord.”

Read the original article here.


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