Currency manipulation – the next level in the Cold (Trade) War?

For many market players, competitive devaluations are an integral part of a trade conflict. The dispute between the USA and China, which has been openly waged for more than a year now, is becoming increasingly heated. But so far it has remained confined to a fatal spiral of punitive tariffs and countermeasures at the real economic level. Nevertheless, there is growing unease on the US side about exchange rate developments. US Secretary of Commerce Ross recently threatened to impose punitive tariffs on countries that he suspects of engaging in currency manipulation in order to give their export trade an unfair competitive edge over US rivals.

This might not sound particularly exciting at first, but in actual fact it is an expression of a US domestic power struggle. Until now there was never any doubt that the assessment of currency manipulation was a matter for the US Department of the Treasury, which publishes a half-yearly report on this subject. The report actually due for release in April is still outstanding and should be published shortly. Instead, the US Department of Commerce has presented a draft which it also intends to use as a basis for a decision on currency-related disadvantages for the US economy. Dating back to 1930, the Department of Commerce has had decision-making powers to react to foreign subsidies with punitive tariffs. Now it is embarking on an ambitious step in an attempt to have an undervalued currency classified as inadmissible state financial aid. Particularly contentious is the department’s claim that it will of course respect the sovereignty of the US Treasury Department in this matter – “… unless (literally) we have good reason to believe otherwise”). In case of doubt, President Trump can be expected to stand on the side of his Secretary of Commerce in order to finally declare war on this (in his opinion) long-lasting manipulation, something that the Treasury has denied him until now.

This inevitably signals a new period of uncertainty for currency markets. Not only will the prospect of a further currency-induced round of US punitive tariffs give cause for irritation; the foreseeable wrangling over competences between the Department of Commerce and the Treasury could also turn into a battleground. At the moment we are only dealing with a draft, and there is no certainty as to whether it will actually enter into force. In addition to the implementation risk, many other questions remain unanswered: Which approach is methodically correct for assessing a fair exchange rate? How openly will a potential conflict between the Department of Commerce and the Treasury be fought? Are punitive tariffs really suited to cause a currency to appreciate if it is

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