Global Macro & FX: Intervention to weaken the dollar unlikely, but cannot be ruled out – US exchange rate policy has been in the spotlight recently, and US Treasury Secretary Mnuchin was quizzed on the topic in a post-G7 finance minister meeting press briefing this afternoon. In his remarks, Mr Mnuchin confirmed that there is no change to the US administration’s dollar policy ‘as of now’, although he did not rule anything out either, stating ‘this is something we could consider in the future’. This followed a tweet by President Trump on 3 July hinting at currency intervention, when he said the US should ‘match’ China and Europe who he accused of ‘playing [a] big currency manipulation game’. We judge that unilateral intervention to weaken the dollar by the US authorities is unlikely, as that there is little chance of it being effective, but given the erratic moves of the administration it is not something we would dismiss outright.
Why we think intervention is unlikely – First, the liquidity of the dollar market is immense, and so it would take enormous firepower for any FX intervention to be effective. Second, the unilateral interventions are typically ineffective beyond the immediate short-term, and in the past it has taken globally coordinated interventions (for instance that resulting from the Plaza Accord in 1985) to have a lasting impact on markets. Given the US dollar is not especially overvalued (it is strong by historic standards, but nowhere near extremes), and given President Trump’s combative rhetoric on the topic, it looks unlikely that the US would be able to persuade key trading partners of the need to intervene in weakening the dollar. Taken together, the case for intervention is hardly a strong one. With that said, the same argument could be made about the effectiveness of trade tariffs, and yet tariffs were nonetheless imposed. We cannot therefore rule out the possibility that the administration goes down this path.
What is the legal framework for currency intervention? The US Department of the Treasury is primarily responsible for exchange rate policy, in consultation with the Federal Reserve (and with the New York Fed executing currency interventions). This is in contrast to the eurozone, where the ECB is primarily responsible for exchange rate policy (although there are as-yet unused provisions for the ECOFIN to direct policy). As such, the US administration is legally within its right to change policy on the dollar and to direct interventions, though there would likely be considerable pushback from the Federal Reserve (and before that, from within Treasury itself) given that intervention would likely be ineffective. (Bill Diviney & Georgette Boele)