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US prepared to bring down the dollar

UNITED STATES, WASHINGTON (OBSERVATORY) — As the world economy slows down and enters the pre-crisis stage, leaders of different states are increasingly thinking about how, despite everything, to support economic growth. One of the ideas on the surface is to depreciate their own currency in order to create favorable conditions for exporters and businessmen working in the domestic market.

The United States is most active in this direction, despite the fact that the US economy looks slightly better than its competitors. America has all the trump cards in hand in order to win this game (at least, leading analysts say so), but if the currency war is added to the current trade war, everyone will lose to one degree or another. Details are in the material of Izvestia.

The most overvalued currency

Although the US economy showed excellent results in the first quarter of 2019 (growth was 3.2%, much higher than expected), unemployment rates are still at historic lows, and banks are giving out more loans, some sectors show a clear tendency to weaken – above all industrial production. Official and private surveys of business leaders also show that not everything is as perfect as it seems with a cursory glance at the statistics.

Over the past two years, the White House has been regularly introducing protectionist policies to support the national producer – and so far, despite all the complaints, it is making some progress. However, there is a factor that weakens the positive effects: a strong dollar . In 2014, the US currency grew by almost 20% against the euro – from $ 1.35–1.4 for € 1 to $ 1.1–1.15. It was not possible to return to previous indicators.

At the moment, according to the Bank for International Settlements, the dollar is the most overvalued currency in the world – its real rate is much lower . Only the Swiss franc can compare with it in excess of the nominal value over the real one. This has happened before, but only during periods of crisis, and not economic growth, when investor money goes to the euro and to emerging markets.

This is largely due to the fact that the US Federal Reserve began to raise rates since the mid-2010s . Positive changes were observed in the American economy, although the country, with difficulty, began to cope with the consequences of the global financial crisis. The Fed responded with a gradual increase in rates, trying to prevent a possible overheating of the market (this, however, did not prevent the GDP from growing with acceleration, and stock indices almost every month update historic highs).

In Europe, the situation was different: the continent did not have time to move away from the crisis of 2008, when problems with the debts of Greece and other southern countries broke out. Even after their relatively successful resolution, economic growth in the European Union and especially in the eurozone remained anemic.

So, no one turned off the “quantitative easing” here and the rates remained at the same zero level. The difference in rates between the US and the eurozone was 2.5 percentage points, and the strengthening of the dollar against this background was predictable.

Now the Americans are thinking about correcting this discrepancy. President Donald Trump has repeatedly demanded that Fed Chairman Jerome Powell start lowering rates – and put forward just too strong a dollar as the main justification. Despite the decline in oil and gas imports in recent years, America’s trade balance remains deeply negative, which, according to authorities, is due to the expensive American currency.

At the same time, Washington is confident that foreign central banks deliberately keep their currencies weak in order to get great benefits from trade with the United States. In May, the US Treasury Department added three eurozone countries – Germany, Italy and Ireland – to a special watch list as potential currency manipulators. Now it already has China, Vietnam and Singapore. American regulators were not stopped by the fact that the main decisions on monetary policy in the eurozone are made in Brussels.

Nowhere to retreat

However, if Americans think that the rest of the world will sit back, watching the Fed and the US Treasury lower the dollar, then they are most likely mistaken. Europeans, for example, have nowhere to retreat, the strengthening of the euro against the dollar will multiply many times the difficulties that the EU economy has in abundance. It is enough to take the statistics released in recent days. The activity index in the industry of the eurozone in July fell to 46.4 (a value of less than 50 shows a decrease, higher – growth).

This is the worst result in seven years. In Germany, the EU’s largest economy, the fall turned out to be even deeper – up to 43.1 points. A recession is also noted in France. The colossal trade surplus of the eurozone (over € 200 billion) shows how much the territory of the monetary union depends on a cheap euro – its growth can be devastating for entire sectors of the economy.

The ECB in the very near future may increase the stimulation of the economy, which will be expressed both in a reduction in interest rates (interest rates on one-day deposits are already in the negative zone, now overnight loans may follow in the same direction), and in the next episode ” quantitative easing, ”that is, buying up assets. Mario Draghi has not been embarrassed by his super-soft financial policy since taking up the presidency of the Central Bank, so it’s unlikely that something will stop him this time either.

In addition to Europe, Japan may also put pressure on markets. Haruhiko Kuroda, head of the Japanese Central Bank, directly promised that his institution would aggressively pursue a mitigation policy. The People’s Bank of China, whose economy is experiencing difficulties in connection with US duties, is also ready to conduct a new round of stimulation.

But it is likely that this time the matter will not be limited to a simple reduction in rates. Regulators of different countries can take direct interventions in the foreign exchange market, which on a large scale has not happened for a long time. In America, currency interventions were conducted during the presidency of Jimmy Carter, George W. Bush and Bill Clinton. Since then, the Ministry of Finance’s entry into the foreign exchange market, well known to us from domestic experience, in developed countries began to be considered a bad manners, but the more the “game by the rules” in the world economy is replaced by elements of power politics, the more normal this situation will look.

In any case, the United States will have an edge over its rivals in a full-blown “currency war” – at least for a while. According to Joseph Gagnon of the Peterson Institute of International Economics, America simply has more “ammunition” due to the prevalence of the dollar as a world currency. If, for example, Switzerland starts selling francs to lower its exchange rate, the US Treasury will easily stop these attempts by purchasing the appropriate number of francs , the economist explained in an interview with The Financial Times.

There will be no winners

The last time “currency wars” were observed in the world in the early 2010s, when the central banks of Brazil, Japan, China, and Taiwan regularly conducted interventions to curb the rapidly growing exchange rate of their currencies. This time, however, the scale of the phenomenon promises to be far more serious.

In the short term, the United States can prevail in a currency war , just as they manage to get competitors to yield on the issue of duties, but in the long term, everyone will be the losers. Inflation in developed countries (and in many developing countries as well) is now really low, and even a consistent depreciation of the currency will hardly be able to disperse it.

However, too soft a financial policy is likely to lead to inflation of bubbles in the stock markets, despite the fact that now all the signs of such unhealthy phenomena are present. As the bubbles were blown away, we already saw it very well in 2008, and there is no reason to believe that the collapse of financial assets will be something better than the collapse of the real estate market

At the same time, the race of interventions between central banks is unlikely to help alleviate friction between the major players in the global market. Confidence is already at extremely low levels, and hostility is growing. At the first symptoms of the crisis, everyone will be saved as best they can, only exacerbating the situation of neighbors. In this sense, the currency war can become a new round of the ongoing trade war and accelerate the collapse of globalization, as we know it today.


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