Dollar Tumbles On Report Trump Studying Ways To ‘Penalize Currency Manipulators’

A man holds a newspaper  as he looks at an electronic board displaying stock prices at a brokerage house in Beijing, Monday, Dec. 5, 2016.  (AP/Andy Wong)

A man holds a newspaper as he looks at an electronic board displaying stock prices at a brokerage house in Beijing, China, Dec. 5, 2016. (AP/Andy Wong)

Moments ago, all three main US FX pairs, the yen, euro and yuan snapped higher, following a CNBC report according to which the Trump administration is studying ways to penalize countries whose currencies it believes are undervalued. CNBC cited two unidentified people with direct knowledge of the review who work within the administration.

Trump’s econ team is studying alternative strategies to labeling China a currency manipulator, the people say and add that the “effort” includes Treasury, Commerce Dept, National Economic Council, National Trade Council and the office of the U.S. Trade Representative One law that has generated particular attention is the Trade Enforcement and Trade Facilitation Act.

The result: an immediate plunge in the USD as follows:

USDJPY

USDCNH:

In the report, CNBC notes that the Trump administration is assessing the scope of its power to penalize countries whose currencies it believes are undervalued, according to two people with direct knowledge of the review, “an effort to fulfill the president’s campaign pledge to crack down on what he frequently called unfair trade.”

President Donald Trump promised to label China as a currency manipulator on day one of his presidency, but has not done so. That process is actually directed by the Treasury Department, which is not slated to release its official analysis of international currency until later this spring. Even then, many analysts are skeptical that the administration would take the aggressive step of slapping China with such a label.

In the meantime, the administration’s economic team is looking at alternative strategies, said the two people, both of whom work within the administration. The effort includes not only Treasury, but also the Commerce Department, National Economic Council, National Trade Council and the office of the U.S. Trade Representative, one of the officials said.

According to CNBC one approach that has garnered particular attention is the Trade Enforcement and Trade Facilitation Act, which was enacted during the final months of President Barack Obama’s administration. “It was intended to act as a check on separate legislation that gave Obama broad latitude to negotiate the Asian trade deal known as the Trans-Pacific Partnership, or TPP. Critics of that agreement argued that it did not sufficiently protect against currency manipulation.”

The Trade Enforcement and Trade Facilitation Act details several consequences for nations that have devalued their currency and also have large current account surpluses. It allows the president to block future federal contracts with those countries and to choke off government financing for U.S. businesses seeking to invest there. The law also calls for pressuring the International Monetary Fund for heightened surveillance and for currency valuation to be considered in trade negotiations.

“China is likely to take overt as well as covert retaliatory actions, that could include restricting American companies’ access to markets and investment opportunities in China, as well as disrupting the supply chains of U.S. businesses that rely on Chinese intermediaries,” said Eswar Prasad, a trade professor at Cornell University. “The U.S. economy, especially U.S. multinational corporations that operate in China in one form or another, could suffer significant collateral damage if an open trade war were to break out.”

That said, it is unlikely that China, or any other nation will be branded a currency manipulator outright: as CNBC notes, “to be labeled a currency manipulator, China would need to meet three rigorous requirements: a U.S. trade surplus of more than $20 billion, a current-account surplus of more than 3 percent of its economy and purchases of foreign assets totaling more than 2 percent of GDP. The last analysis by the Obama administration found that China met only the standard on bilateral trade.”


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