U.S. Dollar Policy: Through the Looking Glass of U.S. Currency Intervention

It is no secret that the U.S. administration wants a weaker dollar: It would make American exports more competitive and potentially boost growth. But would the U.S. cross into the world of currency intervention to make it happen?

President Donald Trump has claimed many times that China has unfairly manipulated its currency. Recently, he lashed out against the European Central Bank (ECB) for hinting at additional monetary policy stimulus because it might drive the euro lower against the dollar. Consequently, investors have become keenly attuned to the possibility of a shift in the strong dollar policy that has been in effect through several U.S. administrations.

Although Trump reportedly rejected one proposal to intervene in the currency market last week, the idea has clearly come under discussion within the administration amid trade frictions and slowing global growth. Indeed, Trump could possibly change to a stable dollar policy.

However, we think that intervening in currency markets to weaken the dollar is unlikely. These days, currency intervention by developed market governments is rare. Typically, it occurs only when markets become dysfunctional due to a significant event, such as Japan’s earthquake in 2011, or when the valuation of a major currency becomes so extreme that it creates a collective interest in reversing the trend.