Foreign-exchange traders are always scanning the globe for signs of government intervention in the market - but it’s rare for them to suspect the world’s reserve currency as a candidate.
That’s changed after US President Donald Trump repeatedly signalled his preference for a weaker dollar and accused other countries of manipulating exchange rates.
The administration’s rhetoric could foreshadow a shift to an interventionist policy, according to Michael Feroli, JP Morgan Chase & Co’s chief US economist. Deutsche Bank AG sees a material risk that Trump will become the first president in recent history to take measures to weaken the dollar.
“It would be foolish to ignore” the possibility of the US selling dollars, said Aaron Hurd, a money manager in the currency group at State Street Global Advisors, whose team manages $118bn. The early stages of any intervention would spark a “very serious correction in the dollar” as speculators piled in, followed by a period in which traders would challenge the Treasury’s ability to sustain prolonged selling, he said.
The dollar has risen 2.7% year-to-date, buoyed by strong US growth, rising interest rates and escalating trade tensions, which boost the greenback’s appeal as a haven.
Last month, Trump blasted China and the European Union for manipulating their currencies, leaving investors to wonder whether he would go further than jawboning the dollar.
“No one can really feel confident with predictions in this very unconventional administration,” said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer Asset Management, which manages about $89bn. “That said, I strongly doubt the US would intervene,” because the greenback is supported by robust growth and tightening monetary policy, he said.
Intervention to weaken the dollar would prompt knee-jerk selling of the currency - but that “would be faded pretty quickly because the markets will conclude there is no justification for a weaker USD,” Upadhyaya said.
The US hasn’t intervened in markets to sell the dollar since 2000, when it united with fellow members of the Group of Seven in an effort to boost the sliding euro.
It last bought greenbacks in 2011 as part of an international bid to stop the yen from surging after an earthquake and tsunami in Japan led locals to repatriate cash.
It’s “highly unlikely” that the US will step into the FX market, said Mark Sobel, a former official who worked at the Treasury Department for nearly four decades and managed the $95-bn fund that can be used to intervene. The threat of retaliation by other nations should also be a deterrent, said Sobel, who’s now a senior adviser at the Center for Strategic and International Studies.
“We’d probably see some pushback globally,” if the Treasury intervened, JPMorgan’s Feroli said in an August 9 interview on Bloomberg TV. What’s more, such a move might create tension with the Federal Reserve, which has been tightening monetary policy since 2015 and is expected to continue.
Interventions have gone in and out of fashion in recent decades, with the Carter, Bush senior and Clinton administrations all taking part in “frequent and meaningful” actions, Deutsche Bank AG strategist Robin Winkler wrote in an August 9 note.
“If the current administration decided to turn the trade war into an open currency war, it is possible that it would consider intervention as a policy instrument,” Winkler wrote.
“While currency intervention has been out of fashion for the best part of the last two decades, history suggests that policy shifts can occur quickly.”
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