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Dethroning the King: Five ways Trump could weaken the dollar
Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn’t have even considered this question. But under this new mercantilist US regime, who knows? We identify five ways in which Washington could try to engineer a weaker dollar
- Key messages: Time to consider how Trump could weaken the dollar
- White House needs a weak dollar for US trade policy consistency
- Dethroning the King: President Trump’s toolkit to weaken dollar
- US Treasury FX Intervention | Likelihood: Very Low | Impact: Limited
- Altering the Fed’s mandate | Likelihood: Very Low | Impact: High
- White House dollar jawboning | Likelihood: High | Impact: Negligible
- Pressure major trading partners to strengthen their currencies | Likelihood: High | Impact: Medium
- A US Sovereign Wealth Fund | Likelihood: Very Low | Impact: Medium
- Bottom line: Weak dollar policy will be self-fullfilling
- Footnotes
Key messages: Time to consider how Trump could weaken the dollar
- President Trump’s ramped up verbal jawboning in recent weeks suggests that current USD strength may be the upper bound of the White House’s tolerance level
- We identify five policies that the White House could employ to weaken the dollar: (1) US FX intervention and building out US FX reserves; (2) Changing the rules of the game for the Fed; (3) Ongoing jawboning and talking down the dollar; (4) Pressuring major trading partners to strengthen their currencies; (5) Creating a US sovereign wealth fund.
- We don’t think any small-scale unilateral intervention by US authorities will have a sustained impact on weakening the dollar. The best historical precedent – the Bush FX interventions in 1989-1990 – shows that this approach had a limited impact in driving the USD materially lower.
…click on the above link to read the rest of the article…
It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.
We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China’s devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys.
But even as the cat was out of the bag for Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China’s FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted “substantial selling pressure” in long-term USTs emanating from somebody in the “Far East”, and ii) Bill Gross asked, in a tweet, if China was selling Treasurys.
Sure enough, on Thursday we got confirmation of what we’ve been detailing exhaustively for months. Here’sBloomberg:
China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.
…click on the above link to read the rest of the article…
