US president has warned EU attempts to hold down euro exchange rate will be deemed provocation.Donald Trump has set the stage for a currency war between the EU and US after the outgoing European Central Bank President Mario Draghi said he would be open to boosting monetary stimulus if economic conditions in Europe do not improve.
His remarks earlier this week could mean interest rate cuts or the printing of new money to buy assets such as government bond. Yet Trump quickly accused Draghi of deliberately trying to weaken the euro, thereby “making it unfairly easier” for the eurozone to compete against the US.
“It was not the first time Trump has blamed currency manipulation overseas for a strong dollar that raises the cost of US exports,” says the Sydney Morning Herald. “He has already become unique among recent American presidents in a shift away from the ‘strong dollar’ policy of his predecessors.”
“It’s usually not hard to tell when a war has started: One nation crosses another’s border with soldiers, tanks, and planes,” says Peter Coy in Bloomberg Businessweek. “Currency wars are tougher to call, partly because there isn’t even a clear definition of what they are”.
The phrase “currency war” was first famously used by Brazilian Finance Minister Guido Mantega back in 2010 when major central banks began debasing their currencies by slashing interest rates to near zero and printing money to buy financial assets.
“Your currency gets weaker, so your products get cheaper relative to those of other countries, and so you benefit at the expense of other nations around the world. It was viewed as a modern-day version of tariffs – a repeat of the protectionist spiral we saw after the Great Depression,” he writes.
Nor is it just the EU that has drawn the ire of the president over accusations of exchange rate manipulation. One of Trump’s main attack lines during the 2016 presidential campaigns was the China was deliberately keeping the yuan low in order make foreign exports cheaper. It formed the basis for his ongoing trade war with Beijing.
Yet “Trump’s argument that China is manipulating its currency is even weaker than his case against Europe,” says Coy. “Far from pushing down the value of the yuan, the People’s Bank of China has been countering market forces to slow its decline.”
“The fear, however, is that Trump's anger over the currency shifts could also help fuel further trade actions, including tariffs he has threatened to impose on imported cars and parts from the EU but put on hold for 180 days,” says the Sydney Morning Herald.