Trump US dollar intervention won’t work, Macquarie says

Evan
Vucci/AP

• Media reports in recent weeks have suggested President
  Donald Trump is ready to stage an intervention to weaken the
  dollar.
• A note from Macquarie this week highlighted a series of
  issues with any attempt to do so.
• Interventions from major economies are rare — except in
  the most exceptional circumstances — and are not usually
  undertaken simply because a leader is unhappy with the strength
  of his country’s currency.
• Even if Trump succeeds in an intervention, it may not
  actually fulfill his aims.

President Donald Trump is preparing a possible intervention in
the currency markets to prevent the continuing surge of the US
dollar,
according to numerous media reports over recent weeks, but
that may not actually fix the issues he has with America’s
rampant currency.

That’s according to Thierry Wizman, a strategist at Macquarie,
who believes that even if Trump manages to navigate the many
diplomatic hurdles to intervening in the dollar, doing so will
not really solve anything.

“While past interventions have been done only with the assent of
other G-7 countries, Trump’s willingness to deviate from past
practices in international-economy policymaking seems to raise
the probability of unilateral intervention,” Wizman, alongside
Teresa Lam, Gareth Berry, and Nizam Idris, wrote.

That unilateral intervention, however, would still need Trump to
negotiate a series of issues domestically and internationally
before actually getting involved.

First up, he’d need the help of the Federal Reserve. While Trump
and Treasury Secretary Steven Mnuchin would be the ones to make
the decision to artificially devalue the dollar, the Fed would be
responsible for actually undertaking that devaluation.

The Fed is independent of government, and as such, is not bound
to do the bidding of the president, so Fed chair Jerome Powell
could, in theory at least, refuse to undertake such an exercise.

“While it is the Treasury that has primary purview over USD
policy, intervention takes place in consultation with the Fed,
and the intervention is conducted by the Fed,” Wizman and his
team wrote.

“The Fed, of course, then has discretion to sterilize the
intervention, which it always has, in order to signal that the
intervention is not intended to be ‘monetary’.”

They added: “The currencies that are bought/sold (e.g., USD or
FX) have come equally from the Fed’s and Treasury’s holdings (in
its Exchange Stabilization Fund). This means that there has to be
some agreement, lest Fed independence is compromised.”

Not only would hurdles present themselves at home, issues would
abound internationally. First off, currency interventions have
historically only been undertaken by major economies if they have
the backing and cooperation of other influential states.

“Past interventions that involved US authorities have usually
been coordinated with the G7 in response to extraordinary
events,” Macquarie’s team wrote, pointing in particular to
the 2011
G7 intervention to weaken the Japanese yen after the devastating
Tohoku earthquake and tsunami.

The chart below shows recent currency interventions from major
economies:

Macqaurie

Given that Trump’s sole reason for favoring a currency
intervention seems to be to make the US more competitive in terms
of trade, it seems highly unlikely that any G7 members would be
willing to help. That would mean a unilateral intervention by the
US.

“Unilateral intervention would violate implicit agreements, and
would be resisted by the Treasury’s diplomats,” Macquarie said.

A final impediment is a legal one, Macquarie notes. Currency
interventions in the US are regulated both by rules from the
Federal Reserve and the wider international community, including
the International Monetary Fund.

Under those rules, currency interventions can only be legally
justified “to ‘counter disorderly market conditions,’ in
cooperation with foreign central bank,” according to Wizman and
his team.

The IMF’s rules specifically prohibit currency interventions as a
way to “remedy trade deficits.”

Therefore, Macquarie argues, Trump could only legally intervene
in the dollar if “he made a case that US fundamentals weren’t
strong.”

Assuming Trump manages to get over those three substantial
hurdles, Macquarie says he will have another problem — that
intervening in the dollar may well fail to do what he wants it
to.

Here’s the key paragraph from Macquarie (emphasis ours):

“Practical difficulties with unilateral intervention aside,
there is no strong consensus on the effectiveness of
sterilized intervention in floating FX markets
anyway. Official USD sales might be seen as
effective as a signal of policymaker intent, but only when the
intervention is consistent with other economic policies. But that
wouldn’t be so until the Fed is no longer willing to raise US
policy rates further. Trump will be alerted to all of the
drawbacks by all of his advisors, if he were to consider
intervention.”

If Trump decides this is all too difficult and long-winded,
Macquarie said, there is another more palatable option for
weakening the dollar: using Twitter.

“Trump may resort again to jawboning the USD lower through
repeated verbal interventions in (uncontrolled) settings such as
stump speeches and interviews, as an alternative to
intervention,” the team concluded.