Currency wars trump: how the U.S. provoked a jump in the Euro

Germany uses an undervalued Euro to obtain trade advantage over its partners — the US and other EU countries, said the Advisor to Donald trump, head of the National trade Council American President Peter Navarro. His comments published on Tuesday, January 31, the British Financial Times. According to Navarro, this is precisely the position of Germany stop to take a us-European free trade agreement, negotiations on which began in 2013. The Euro-dollar exchange rate on the statements of the adviser to trump jumped nearly 1%, to a maximum of eight weeks.

“Germany uses an extremely low rate of the Euro as a virtual dolcemente (implicit Deutsche Mark) and thus continues to benefit from trade with other EU countries and with the United States, — quotes FT response to Navarro. — This position of Germany is markedly prevents the United States was considered the Transatlantic trade and investment partnership (free trade agreement between the EU and the USA. — ) win-win deal”.

Navarro’s comments triggered a jump in the Euro against the dollar on the world currency market. As of 19:42 GMT the Euro was trading at nearly $1,08 (+1% from the previous day). “The Euro has significantly strengthened during the European session, after Navarro, who has accused Germany of manipulating the Euro,” said Reuters analyst at Commonwealth Bank Adam Myers. At the same time, the dollar index US Dollar Index showing the ratio of the dollar against a basket of six major currencies, fell by almost 0.9%.

“It is unusual to hear from a government official comments on the currency of another country” — said the chief currency strategist at Rabobank Jane Foley, specializing in the G10 currencies. “However, what Navarro said about the Euro is true,” she says. According to her, the Euro is undervalued from the point of view of most ways of measuring. “That is why Germany is one of the main beneficiaries of the European monetary Union,” said Foley.

The Euro is trading below its fair value at 9-25%, according to four different variables, based on which it calculates the index of purchasing power parity OECD, writes Bloomberg. In a dozen major world currencies the Euro is the furthest away from their fair value should be from this index.

Currency war

Words Navarro can be considered another step towards a global currency war, the risk of which warned analysts watching the statements of the new President of the United States. Trump, “broke with the unwritten rule that an opinion on the dollar — it is the prerogative of the U.S. Treasury, not the President,” writes HSBC in a review on January 30 under the title “trump, currency manipulator” (have). In a recent interview with the Wall Street Journal, trump said that the United States can’t be competitive, because the dollar is “too strong and it kills” the American economy. Verbal interventions trump in January, were a key factor explaining the reversal in the weakening of the dollar, says HSBC, is exactly the same as trump’s victory in the election in November resulted in a sharp strengthening of the American currency.

The last decade regardless of changing administrations, the U.S. Treasury has traditionally maintained a policy of “strong dollar,” recalls Jane Foley from Rabobank. But in recent years it was discussed all the time, no country wants an overvalued currency, and the US is also faced with low inflation and weak economic growth. “It is clear that if trump wants to tackle the problem of foreign trade imbalance of the United States, the preferred way — it is weak currency, and initial signs indicate that the new administration can officially move away from the policy of a strong dollar,” said Foley . However, the direction of exchange rates is still dictated by the difference in interest rates, and in this sense, control over the exchange rates belongs to Central banks, the expert said.

HSBC writes that economists are well familiar with the concept of the “impossible triad”: it is impossible to simultaneously control the exchange rate to have independent monetary policy and to support the free movement of capital. Trump is unlikely to violate the law of economy. Moreover, its own economic agenda suggests a mixed impact on the dollar. For example, trump wants to cut taxes and increase budget spending, stimulate investment in the American economy and return to the United States jobs — all this is more likely to work on the strengthening of the dollar. Trump can speak about desirable weakening of the dollar, but during his campaign he promised a very different, say economists at HSBC, and when issues of immigration and trade will depart on the second plan in its current agenda and give way to stimulate economic growth, the dollar rally will resume, they expect.

Response Berlin

Navarro’s statements are consistent with the view of trump, expressed in an interview with the WSJ a few days before his inauguration, when he called the EU a “tool.” Then trump made possible disintegration of the EU, which will be provided gradual retirement of unit members. Earlier trump welcomed the release of enterprises in the UK.

These comments pose a problem for German Chancellor Angela Merkel, writes Bloomberg. This year, Germany takes the role of the presidency in the G20, and pursuing a policy aimed at strengthening the regimes of free and fair trade. The upcoming G20 summit will be held on 7-8 July in Hamburg and will be the first meeting of “twenty” with the new American President.

Merkel on Tuesday rejected criticism of the adviser to trump, saying the country has no levers of influence on the European Central Bank, whose competence includes the issues of foreign currency exchange rates. The ECB maintains the policy of zero rates in the Eurozone, whereas in the US the key rate twice already increased this differential increases the attractiveness of dollar-denominated investments relative to the Euro. Berlin has always supported the independent ECB and will not influence the policy of the regulator, said the Chancellor. “I have neither the desire nor the ability to change, — said Merkel after talks in Stockholm with Prime Minister of Sweden Stefan Löfven. — In addition, we seek to trade on the world market competitive products on equitable terms.”

The Ministry of economy of Germany also rejected accusations from abroad. The government has few instruments of influence on the global forces that determine the exchange rate of the Euro, said the representative of the office of Tanya Alemany. “The German government cannot influence expectations related to the interest rate, and the impact that they have on the exchange rate”, — quotes Bloomberg review Alemany. The policy of Germany to protect the surplus country’s current account, which in 2016 reached 8.7% of GDP and, critics say, impedes the recovery of the Eurozone. “Please, do not blame the Germany positive trade balance”, — said Bloomberg, on 19 January, on the sidelines of the forum in Davos, Finance Minister Wolfgang Schaeuble. It is unfair to blame Germany alone is in surplus of the balance of payments, because in the Eurozone there are still 18 countries, told Reuters on Tuesday the representative of the German Ministry of Finance. “In the end, no one is arguing about the balance of payments of California” — ironically it.