World central bank interventions raise specter of ‘currency war’

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Are central banks on the brink of a currency war with the United States? That is the question on the minds of some investors and economists, as the fall of the US dollar in the year has forced central banks around the world to intervene in their own currencies at the risk of attracting scrutiny from the new administration of Biden, who is eager to support America’s factories and create manufacturing jobs.

With policy interest rates for some central banks, including the European Central Bank, nearing zero, policy makers are now trying to avoid an appreciation of their currencies to support their pandemic-hit economies and stay competitive. of exports from their countries. “Central banks are trying to stimulate their economies and reflate. But in an environment where demand is weak and rates low, people will turn to the exchange rate channel, ”said Nathan Sheets, chief economist at PGIM fixed income and a former Treasury official in the Obama administration. Other central banks, especially those in Asia, with large trade surpluses needed an outlet to invest their hoard of savings, buying dollar-denominated assets and sometimes even buying other currencies outright. BofA Global Research estimated that a 4% -5% depreciation in the US dollar would historically cause central bank holdings of Treasurys TMUBMUSD10Y, 1,168% to increase by $ 160- $ 180 billion. The ICE DXY US dollar index, -0.57%, a measure of the dollar’s strength against its main rivals, is down 6.6% in the past 12 months, according to FactSet data. Backlash Overseas central banks will remain vigilant as more pro-worker voters in the Biden administration pressure the federal government to take a more aggressive stance to reinvigorate American manufacturers. “The Treasury is going to be firm in the countries that carry out interventions, especially in the most sustained ones. Economic realities demand it and political realities demand it too, ”said Sheets. At Janet Yellen’s confirmation hearing for the US Treasury secretary, the former chairwoman of the Federal Reserve suggested that she would look down on other countries that move exchange rates away from market-determined levels. The Treasury had branded Vietnam a currency manipulator in December. Additionally, the Treasury has also included China, Korea, Singapore, Taiwan, Thailand and India on its watchlist. Read: Yellen’s harsh words for China show that Biden’s team will continue the fight Trump started. “Central banks in Asia are worrying about US reprimands and retaliation,” wrote Shilan Shah, senior economist at Capital Economics. Perhaps that is why some central banks, including Chile and Sweden, have started announcing in advance that they would start buying currencies. The Bank of Israel said it would buy $ 30 billion of other currencies over the course of 2021. Read: Here’s why foreign central banks are ready to resume their role as a major buyer of US government debt. Market participants say the US Department of the Treasury won’t be able to match his bark with his bite. “The stock line that the United States wants the dollar to be determined by the market is just a stock line. It doesn’t really mean anything, ”said Ed Al-Hussainy, senior currency and interest rate analyst at Columbia Threadneedle Investments. Al-Hussainy pointed to the example of the Swiss central bank as an indicator of America’s impotence. The president of the Swiss National Bank, Thomas Jordan, has said that criticism from the United States will not prevent the central bank from buying more currencies to avoid the appreciation of the currency. “What are they going to do? Sanction Switzerland?” Al-Hussainy said, describing it as a “moment of truth” showing that the United States would have difficulty imposing its will on foreign central banks. The problem will disappear by itself. even without any action from the US Treasury Department. “If I have to guess, I don’t think we’ll get to a currency war like this,” said Stephen Jen, who runs hedge fund Eurizon SLJ Capital, in comments posted. Jen anticipated that US economic growth would outpace the rest of the world as 2021 begins. The US government’s pandemic relief measures easily overshadowed the fiscal efforts of other governments. St. Louis Federal Reserve James Bullard said that US economic growth is likely to exceed 6% this year and outperform China. At that time, the strength of the US economy would diminish. You need the trade boost of a weaker dollar. “In that environment, currency problems are less likely to come to light,” said Sheets.