President Trump decided to weigh in on currencies and interest rate policy Monday morning. Sort of.
Here is his tweet:
His message isn’t consistent with where things stand in global currency markets. And it’s vague. It’s not at all clear what signal he’s sending about a preferred policy.
Let unpack it.
Russia and the Ruble
The comment about Russia is curious. While Russia is of course an important geopolitical player, its sclerotic economy and isolated financial system mean that it’s not an important player in global commerce.
For example, the United States’ trade with Russia is a rounding error — $17 billion worth of imports in 2017 (Chinese imports were 31 times that high). And the ruble is not on the radar of currency traders, the way that, say, the British pound or Swiss franc is.
It’s true that the ruble has plummeted against the dollar this month, falling about 8 percent. But that isn’t because the Russian government is playing some devaluation game. The ruble fell because stringent new sanctions on influential Russians are crimping demand for the currency.
China and the ‘Currency Devaluation Game’
In the case of China, the accusation is outdated. China has allowed the value of its currency to rise in the last year — to 6.3 yuan to the dollar from 6.9 yuan to the dollar last April. That is the opposite of a currency devaluation game.
But the president’s statement has greater validity if you look over a longer period. China has used management of its currency to shape its economy. A decade ago, it was doing exactly what the president suggests — pushing the value of the yuan downward to give an advantage to Chinese exporters.
That was implicitly acknowledged in a Treasury Department report last week that declined to name China a “currency manipulator,” as Mr. Trump often argued it was on the campaign trail. That report listed China along with Japan, South Korea, Taiwan, Germany and Switzerland as countries the United States is monitoring for their currency practices.
“China has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade to resist” currency appreciation, the report said.
China has then allowed the currency to appreciate only gradually, the report said, and “the distortion in the global trading system resulting from China’s currency policy over this period imposed significant and long-lasting hardship on American workers and companies.”
As President Trump threatens a trade war, China could use further devaluation of its currency as a tool of retaliation, though doing so would create risks to Chinese financial stability.
‘The U.S. Keeps Raising Interest Rates’
This clause of the tweet suggests these devaluation games are happening as the United States raises interest rates.
It is true that the Federal Reserve has been gradually raising interest rates in the last couple of years, and that you would generally expect higher rates to cause a currency to strengthen, which in turn can damage a country’s export sector.
But the odd thing is these rate increases haven’t been accompanied by a rally in the dollar. It has moved in the opposite direction: The dollar index is down 9 percent since the first Fed rate increase in December 2015 and down 11 percent since President Trump’s inauguration in January 2017.
The reasons for this are much debated in international economic circles. But a key driver seems to be an improving global economy that is increasing the appeal of other currencies.
The Fed sets interest rate policy based on what it sees as the interests of the United States economy, with currency levels one of many factors that are considered. So it is certainly possible for tighter Fed policy to trigger a stronger dollar, undermining the American export sector. There’s just no real evidence that’s what is happening in 2018.
The president is crystal clear that he thinks the current arrangements of global currencies and trade are deeply flawed. He has yet to make clear what his ideas are to improve them.