Introduction
The new USA government is about to introduce fresh elements into developments regarding monetary policy, banking and finance. New tariffs and a ring of security measures will make an impact. Treasury Secretary Scott Bessent just announced that the USA is considering ‘currency manipulation’. What does he mean? In this case, ‘manipulation’ is a political word, implying the USA asserting its power and authority. In Bessent’s words, “The US has a strong dollar policy, but because we have a strong dollar policy, it doesn’t mean that other countries get to have a weak currency policy”1.
What is Currency Manipulation, and how Might the USA Embark upon it?
Scott Bessent seems clear: if countries with which the USA trades try to weaken their currencies for competitive advantages, the USA is now willing to use its firepower to attack and expose such ‘unfriendly’ countries. How might the USA weaken other nations’ currencies? There is a range of options:
- Spot and forward foreign exchange positions. Given the incentive not to lose money quickly, the most obvious technique would be to engage in sizeable medium and long term forward short positions of the target currency.
- The USA’s central banking system is large, powerful and respected by many other central banks. The Federal Reserve could publish a paper on say, China, explaining why it was selling yuan and encouraging other friendly countries to encourage their central banks to do likewise. The Federal Reserve could subsequently publish regular shortish updates on factual developments and the latest central bank thinking.
- Although this brings larger losses, or gains, into play, trading in shorter term out of the money options would have a greater impact on short term exchange rates somewhat more quickly.
Of course we have not mentioned the dollar itself. Central banks have focussed heavily on currency manipulation, normally to aid their own currency. Many of these techniques involve doing a degree of the opposite in this case regarding the US dollar.
Given the publicity on manipulation of currencies, please note that this is not new; the 1988 Omnibus Foreign Trade and Competitiveness Act obliged the US Treasury Department (DoT) to analyse the exchange rate policies of its major trading partners, and report on any deemed to be weakening their currencies for balance of payments or trading advantages. However, this statute obliged the DoT first to negotiate with the foreign counterparty country seeking to persuade it to change its currency weakening policy. Although ‘bilateral action’ was contemplated, there is no evidence of this ever being enacted.
Another major consideration in this debate is profit and loss. The fear of large losses was doubtless a factor in the styling of the 1988 statute; by compelling the DoT to negotiate rather than engage in ‘bilateral actions’, Congress clearly protected the US balance sheet from the risk of large losses, or gains.
It should also be emphasised that this policy area was raised on Trump’s first day. Immediately, the American press were alarmed at the risk of US relations with Japan, China, Germany and Singapore being disrupted. During the very first days of the new government, currency manipulation was often linked to concerns of countries ceasing trade in dollars. International tariffs, another major new policy was also linked to the broader currency weakening policy; the concept was that if, say, Japan was deemed to be reducing its trade in dollars and weakening the yen then they would be asked/ instructed to reverse such policies for fear of export controls, tariffs and currency manipulation charges and levies2.
Another monetary policy example is short term currency pegging. Like interest rate changes, and by virtue of being short term in nature, currency pegging is often analysed as a policy whose costs and benefits are primarily suffered and enjoyed by the private sector. It is therefore a relatively easy tool for major governments such as the USA to deploy. Of course, although the central bank techniques mainly use short term instruments and trades, pegging is often a long-term strategy of the relevant country.
But currency manipulation as stated by Messrs Bessent and Trump is different. Do not confuse it with international currency games played in recent decades. Traditionally, currency manipulation is a technique employed by weak countries to lower the value of their currencies, in turn lowering the foreign price of their exports and thus gaining a trading advantage. The success of this activity has led many economists to argue that weakening your currency’s foreign exchange rate is healthy for your economic growth. This appears to be exactly what Mr Bessent is now aiming to eliminate.
A good example is China, who engaged in this type of yuan manipulation for at least twenty years until the early 2000s. Not only did this boost Chinese exports, particularly to the USA, but the policy also created a large pool of small Chinese savers keen to buy US government securities defensively. So, for a reasonably long time both countries were happy; China manufactured increasing quantities of global goods, and the USA enjoyed growing demands for its securities and of course enjoyed the gradual strengthening of the dollar.
What Could Go Wrong; Why We Should Worry
The USA, like many other major economies, is growing its public debt levels at increasingly rapid rates. In fact, during the last 20 years the western world has responded to crises by printing more money and buying distressed assets. The US is no exception. Supposedly this was done in concert parties with friends of the USA, but no doubt President Trump has noticed how financially stretched many of America’s friends have become.
Multiple qualified commentators have already warned about the USA manifestly now changing the international rules-based order. Ngaire Woods of Project Syndicate speculates that, having withdrawn the USA from the Paris Climate Agreement and the World Health Organization, President Trump could either withdraw the USA from, or cut the funding of, the International Monetary Fund or the World Bank3.
Ms Woods points out that the USA has benefitted (in the traditional sense) from its role in these institutions. America has sole blocking power regarding major IMF and World Bank decisions that require 85% voter majority. Furthermore, membership of these large institutions must be costed, and in 2023 the US reported that its IMF status was a benefit of US $ 407 million. The inference here is that the new Trump administration is aware of all these points, but considers that the disadvantages to the USA of the present global rules order outweigh these benefits.
Interviewed on UK media, Sir Alex Younger, Head of MI6 from 2014 to 2020, explained that Trump now aims to create a new international rules-based order. Sir Alex believes that Trump no longer respects the era the USA encouraged from 1918, the era of strong rules and international agreements policed by strong and impartial international institutions. This has also of course been an era characterised by the call for more global trade.
Trump now wants new rules, to be policed by strong statesmen. This will be a worrying change from the era envisaged by President Wilson’s January 1918 Fourteen Points speech, the longest of which points was reserved for Russia, who was invited to enter the world stage of countries with firm international policies policed by national (Russian) and international institutions.
President Trump has watched the embarrassments in Gaza and Israel, Iran and Afghanistan and perhaps concluded that modern fringe factions such as Hamas have mastered the art of coping with the Wilsonian rules-based order. His furious attack on Ukraine’s Zelensky as routinely “playing Biden like a fiddle” has elated Russians like Medvedev and shocked multiple European leaders.
And perhaps this almost unprecedented language gives a hint as to what could go wrong and why we should worry. For decades the USA has led the western world on a path towards globalisation trade agreements, towards the diminishing of the nation state, towards solid and reliable international capitalism. Now, it appears, the Trump team are happy to defocus on these issues and Make America Great Again, albeit by disadvantaging nations that have been the USA’s economic friends, perhaps through currency manipulation. Of course, many European countries are dependent on the US not only for security and defence but also for trade and economics. Yet, there appears to exist a reluctance in Europe to recognise that Trump this time means business.
Conclusion – Why Highlight Currency Manipulation Now?
Why has currency manipulation not been announced or enacted before? One obvious reason is cost but, as we have explained, this is perhaps viewed today as less important. But rather than condemn the US government, should we not be recognising how serious these policy differences have become? If the USA is willing to risk mega money on currency manipulation (presumably spot and forward), then the question of what is right now at stake should be in serious and sharp focus.
The second and possibly more important reason is geopolitics. If we have reached the point wherein the USA now considers the present rules-based era to require change, then major new policies will be established.
1 Scott Bessent interviewed on Fox Business Network
2 Currency manipulation warning sparks debate on Trump’s plans
3 What If the US Leaves the IMF and the World Bank? by Ngaire Woods – Project Syndicate
Photo by Mackenzie Marco
