U.S. President Donald Trump talks via speakerphone to Mexican President Enrique Pena Nieto to announce a deal to replace the North American Free Trade Agreement (NAFTA) at the White House in Washington, U.S., August 27, 2018. REUTERS
US President Donald Trump should take a look in the mirror. China isn’t the currency manipulator.
The US is asking Beijing to keep the value of the yuan stable as part of trade negotiations between the world’s two largest economies, Saleha Mohsin and Katherine Greifeld of Bloomberg News reported.
Washington fears that China could weaken its currency to counteract the effect of higher American tariffs on imports from the nation.
That perception is unfair. Despite the trade conflict, the People’s Bank of China has effectively pegged the yuan to the dollar, loyally following the greenback’s cycle.
Since 2015, China’s central bank has been trying to move its peg to a basket of currencies ?“without much success. Psychology dies hard. The Chinese people still associate the value of their currency with the dollar, so when the yuan weakens - because of the greenback’s strength?“ they start to move their money abroad.
Last August, when the yuan was edging toward 7.0 per dollar, the PBOC reintroduced its so-called counter-cyclical adjustment factor, essentially admitting that its attempt to move away from the dollar had failed.
The reality is that if the U.S. wants the yuan to be stable, it needs to steady the greenback first. Trump has repeatedly criticised the Federal Reserve on Twitter for raising interest rates, and has made no secret of his desire for a weaker dollar.
Fed Chairman Jerome Powell finally changed tack in December, suggesting he would be more cautious about future rate increases.
In other parts of the world, such a chain of events could easily be perceived as currency manipulation.
Take a look at Fed fund futures. In three months, the market has turned from seeing two more hikes this year to none at all. The value of a currency depends on interest rate differentials at home and abroad.
How is the U.S. keeping the dollar stable?
U.S. monetary policy is raising eyebrows overseas. Unlike in China, where growth is stumbling, the U.S. economy ?“and inflation expectations?“ are holding strong.
So why are central bankers choosing this time to talk about slowing the trimming of the Fed’s balance sheet?
Is the U.S. central bank exiting its tightening cycle too early?
Sure, the world wants a steady yuan. A China that starts to competitively devalue would spell big trouble for everyone else. But the U.S. should set its own house in order first. - Bloomberg
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