In a series of tweets and interviews over the past few weeks, US President Trump has criticised the Eurozone and a few other countries for gradually weakening their currencies, leading to a disadvantage to US exporters. In addition, Trump has also not spared ECB President Mario Draghi after he said that the central bank was open to additional monetary stimulus.
According to Goldman Sachs analyst, Michael Cahill, Trump’s comments and tweets have put the spotlight back on the US currency policy, cutting against norms that have been in place since the 1990s. Cahill says that while quantitative easing (QE) has become conventional, FX intervention could be a part of Washington’s currency policy. However, such a move could lead to a “sizeable” market reaction. He anticipates a currency intervention to weaken the US dollar along with foreign risk assets like stocks and corporate debt, while the Japanese yen is likely to get stronger.
While the Trump administration is looking for ways to weaken the dollar, Cahill says that while there are a number of operational issues to address, such as the Fed participating or the international committee coordinating such an effort, the Fed’s intent to ease interest rates should be enough to weaken the dollar.