New York: The risk of US intervention to rein in the dollar is rising as a tumbling Chinese yuan stokes speculation that a global currency war is getting underway.
Speculation is building that US President Donald Trump may seek to weaken the dollar after China allowed the yuan to drop below the key level of 7 per greenback, strategists said. If the US authorities do take action, this could sound the death knell of the strong-dollar policy that has been in place for more than two decades.
“If Trump feels that the US economy is going to get on the back foot on the back of this, then absolutely intervention is something that could creep up,” said Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne. “If people genuinely believe that he’s going to do it, they’ll start selling the dollar.”
China’s offshore yuan slumped to a record 7.1114 per dollar on Monday, raising the spectre that Beijing is using its currency as a tool amid a widening trade battle with Washington. Traders are gearing up for the prospect that authorities in other countries around the world will follow suit to safeguard export competitiveness.
White House economic adviser Larry Kudlow said Friday there were no plans for intervention, contradicting President Donald Trump’s earlier remarks that he hadn’t ruled out taking steps to counter the dollar’s strength.
7.1114yuan to the dollar, a record fall against greenback on Monday
The president has repeatedly raised concerns about the value of the dollar relative to trade competitors. The People’s Bank of China pledged to stabilise the yuan after it dropped beyond 7 and said the decline was fuelled by expectations of further tariffs on Chinese goods.
Dollar intervention is likely being “discussed in some corners” among US authorities although there’s little possibility of immediate action, said Shyam Devani, senior technical strategist at Citigroup Inc. in Singapore.
The dollar has strengthened against most of its major peers this year as investors flocked to havens amid the worsening trade war and slowing global growth. A gauge of the greenback has risen in five of the past six months.
Goldman Sachs Group Inc., Scotiabank and Barclays Plc. are among the banks which have warned of possible US intervention to weaken dollar.
The risk of intervention also looms over the yen. Japan is keeping an eye on “nervous” moves in foreign-exchange markets following the threat of further US tariffs on Chinese goods, and excessive moves aren’t desirable, said Yoshiki Takeuchi, the top currency official at the Ministry of Finance.
The yen rallied to 105.79 to the dollar on Monday, the strongest since the so-called flash-crash in January. It has climbed 2.4 per cent over the past month, with the currency’s strength prompting Japan’s largest automaker Toyota Motor Corp. cut its profit outlook last week.
“I don’t think the Bank of Japan will do nothing if this sort of activity carries on,” said Citigroup’s Devani. “The difficulty is at what stage will they do something.”
Still, not everyone is sure the currency moves on Monday herald the start of a global currency war.
“I don’t think China is trying to devalue the yuan,” said Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui DS Asset Management Co. in Tokyo. “We need to see whether the central bank will continue to set the yuan lower at its fixings in coming days.”