The possible devaluation of the US Dollar has been a factor of increasing speculation in the press. US President Donald Trump’s approach to the trade war, combined with the fact that any decision to devalue the US Dollar falls within the scope of the Treasury secretary is resulting in some people starting to think that a USD devaluation is looking more and more likely.
That being said, the US Dollar's status as a global reserve currency means intervention will need to be multilateral to be effective. There seems little reason for the former so any USD intervention is likely to instead, be unilateral.
Unilateral intervention would work to some extent, but the USD’s liquidity causes a fair share of problems - it is, after all, the reserve currency.
It is important to note, however, that while the USD is the main settlement currency for the majority of global trades, US transactions only account for a small percentage of the USD transactions that are settled each day. This, therefore, limits any impact US intervention could have.
Why a devaluation?
Officially, the US position is that it believes that a strong USD is in its interests. This has been the view since the 1990s – the last time the US intervened to support its currency.
That being said, President Trump might have given hints along the year that the possibility of a devaluation might not be thrown out completely. The first hint came towards the end of May when the Trump administration began looking at imposing anti-subsidy tariffs on countries with undervalued currencies relative to the US dollar.
The second hint was the hostile manner in which the Trump administration reacted to the Chinese Yuan passing the 7.0 threshold; he labelled China as a currency manipulator.
Might be the logical next step
The likelihood of US intervention seems high if trade war developments are anything to go by - Trump has frequently commented on the US saying that in his opinion, the currency is too strong in relation to other countries and that China and Europe are using their relatively weak exchange rates as a competitive advantage.
The logical conclusion is thus, that intervention to devalue the US Dollar is likely.
Of course, it would be tempting to dismiss the possibility on the basis that it would be a radical change from the approach that the US has taken over the past last decade. However, that approach was what led to financial markets getting caught out when Trump originally announced the introduction of tariffs. US intervention to devalue the USD before the forthcoming presidential election is a real risk that may not go away in the foreseeable future.
The Fed will likely match a Treasury intervention despite the fact that internally, it probably will not agree with the move. However, it seems unlikely that the Fed will be submissive to external pressures or react directly to Treasury intervention in its upcoming interest rate decisions. Without a doubt, the Fed will want to emphasize its independence given the tensions between the Fed Chair, Mr Powell, and President Trump.
This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.