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The United States uses its currency to promote a "cold war"

By Daniel Shane DANIE
The dollar is at its weakest level in years against other major currencies.

Experts say the fall is being conducted, at least in part, by the US government. And some suggest that it is a deliberate campaign aimed at boosting the US economy to the detriment of major trading partners such as Europe and Japan.

The Trump government is involved in "a cold-war and is winning," said Joachim Fels, an economist at investment firm Pimco, last week.

Instead of an open conflict, which would involve direct intervention in foreign exchange markets, hostilities would become "secret" words and actions, he wrote in a blog post.

"An implicit but very clear signal"

The US economy is growing in a healthy way, and the Federal Reserve is in the process of raising interest rates. Normally, you would expect it to support the strengthening of the dollar.

But some of the comments and actions of the US government are encouraging investors to send the dollar lower. It lost almost 13% against other major currencies since the beginning of last year.

Fels points to the Trump government's measures to reduce taxes and increase spending, which says they are arriving at the "wrong time", that is, when the economy is in good shape. The measures will accumulate more public debt, making investors less eager to hold assets in dollars, such as US Treasury bonds.

Policies like this "are sending an implicit but very clear signal to the markets: a weaker dollar is the goal," Fels wrote. "The markets understood the signal."

Treasury Secretary Steve Mnuchin's comments last week suggesting that "a weaker dollar is good for us in terms of trade and opportunity" has raised sentiment. Later, Mnuchin tried to retract the comments, saying that they were taken out of context. And President Trump insisted he wants a strong dollar.

But Arthur Kroeber, a senior analyst at research firm Gavekal, said that "currency traders should be skeptical" about Trump's comments.

In a note to clients last week, Kroeber said that Trump wants to reduce US trade deficits with other countries. The dollar should fall further to significantly reduce the current account deficit, a broad measure of foreign trade, he added.

"It will now be very difficult for Washington to get the weak dollar gain in the bottle," Viraj Patel, currency strategist at investment bank ING, wrote in a note this week.

He said the "unpredictability" of Trump's policies, particularly in trade, is also contributing to the falling dollar.

"Greater uncertainty"

Trump himself complained repeatedly last year that the dollar was very strong, which attracted criticism from some experts who recalled the long-term government policy of not causing the depreciation of the American currency with such.

These concerns were inflamed again after Mnuchin's comments. "Trump's currency warfare raises risks for Asia," Nikkei magazine Asian Review of Japan said in a column this week.

Tom Holland, another Gavekal analyst, said the "US government's desire to downgrade" made it likely that the dollar will continue to weaken against other major currencies.

"The markets could be heading into a period of increased uncertainty and volatility, where politicians and central bankers in Europe and Asia are also trying to reduce their currencies," he wrote in a note to clients last week.

The advantage of a weaker currency is that it reduces a country's exports, which tends to increase demand.

The dollar is not getting as much support from the Federal Reserve as it would be in a strengthening economy. The US central bank's approach to raising rates was more gradual than some investors predicted.

"No one wants a currency war"

But not all market watchers believe in the idea of ​​an intentional effort by the US government to reduce the dollar.

They point out that momentum in European economies, such as Germany and France, have led some investors to turn to the euro instead of the dollar.

They are betting that the European Central Bank will reduce its huge stimulus program to buy bonds sooner than expected. This would increase European bond yields and make the euro even more attractive.

 In addition, the Trump government could be nervous if the dollar fell much more, according to Greg McKenna, a strategist at currency trading company AxiTrader.

If it gets too weak, investors will demand higher interest rates to keep the Treasury. This would make the US national debt rise even faster.

McKenna also said that since the global financial crisis, major central banks have largely abandoned "neighbor impoverishment" policies - which harms trading partners - and are instead more likely to try to work together.

"No one wants a currency war," he said.

Source: HONK KONG (CNNMoney)


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