Major economies around the globe all seem to covet a weaker currency as risks to growth mount. That makes engineering a lower dollar, euro or other heavyweight all the harder.
President Donald Trump has repeatedly badgered the Federal Reserve to cut rates and complained that the U.S. dollar is too strong. But he’s got competition. It might not mention the exchange rate explicitly, but the European Central Bank is poised to loosen policy, weighing on the common currency.
Bank of Japan Governor Haruhiko Kuroda said the bank will “persistently continue with powerful monetary easing” to boost inflation. In China, the central bank looks set to step up stimulus to revive growth.
Thanks to synchronized monetary easing, any simultaneous moves to weaken currencies might cancel each other out — making beggar-thy-name policies a waste of time.
“Everyone is sort of pushing on the same piece of string,” said Charles Diebel, head of fixed income at Mediolanum Asset Management. “If you have the Fed easing and the ECB easing, it’s just a relative game. It’s very hard for currency volatility to remain elevated.”
Despite the Fed’s increasing dovishness, the greenback has beaten most Group-of-10 peers this quarter. The Bank of Korea surprised markets with a rate cut last week, but the won only weakened briefly. Even though the Swiss National Bank keeps reiterating it has leeway to ease, the franc continues to be buoyant against the euro.
Foreign-exchange strategists say the risk of a U.S. move to weaken the dollar has risen after Treasury Secretary Steven Mnuchin said last week that there’s no change in the nation’s currency policy “as of now.”
Welcome to the latest race to the bottom. In 2010, when major central banks were printing money and cutting rates, causing their exchange rates to fall, then-Brazilian Finance Minister Guido Mantega famously labelled it a “currency war.” The difference is that back then, the dollar was falling and other countries tried to catch up with it.
Now, the greenback is among the most overvalued G-10 currencies, according to a Bank for International Settlements model on real effective exchange rates.
A desire among policy makers to expand their toolkit to prop up growth is understandable. The International Monetary Fund has revised down its growth forecast for 2019 repeatedly as trade and geopolitical tensions threatened to damp the world economy. Major central banks, including those in Switzerland and Australia, are sticking to a low-rates policy.
“If the U.S. wants a weaker dollar now, they are going to struggle to get that with just the use of monetary policy,” said Kit Juckes, a strategist at Societe Generale SA. “Fed policy is no longer the driver of the dollar — growth is. A rate cut by the Fed isn’t going to get the euro stronger if the prospect of growth there is weak.”
Any competitive devaluations are naturally fraught with political tensions, while prolonged low interest rates risk asset bubbles and financial repression.
See it as a U.S.-Europe story, according to Stephen Jen, the chief executive officer of Eurizon SLJ Capital. He reckons the BOJ has already done so much easing that it is now worried about the economic effects of sustained negative rates. Meanwhile, the People’s Bank of China may refrain from enacting a large stimulus amid fears it could destabilize the economy over the long haul.
“It’s really the euro and the dollar racing lower,” Jen said in an interview. “The Fed doesn’t really have a strong case to cut at all as the U.S. economy is doing fine. The real issues are happening outside the U.S. That’s a very different situation than the Europeans face. They are facing weakness right there in Germany.”
Markets expect the Fed to announce a 25-basis-point cut in interest rates next week. Despite that, the euro depreciated 1.7% against the dollar this quarter, and is down 2.5% this year.
It’s unlikely that the U.S. would intervene partly because it risks triggering counter-measures by other monetary authorities, said Bilal Hafeez, former head of G10 foreign-exchange and rates strategy at Nomura Holdings Inc. and now the CEO of Macro Hive.
“What’s more likely is that the Fed would cut rates more aggressively” said Hafeez. “But the extent of dollar weakness will be limited because other central banks are becoming more dovish.”