When the president of the European Central Bank made some coded comments about the possible need for more monetary easing in the eurozone, the US president reached for his smartphone.
“Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA,” Donald Trump wrote on Twitter this month. “They have been getting away with this for years, along with China and others.”
The comments added to a growing sense of concern in foreign exchange markets, where investors fear that Mr Trump’s trade wars could turn into currency wars, with damaging, unpredictable outcomes for the global economy.
Avoiding beggar-thy-neighbour currency policies is one of the founding purposes of the G20 and the latest tensions add another difficult economic issue for world leaders to discuss in Osaka. The Japanese presidency is likely to preserve the G20’s promise to avoid currency manipulation this time around. The international consensus, however, is increasingly under strain.
Mr Draghi was quick to hit back against Mr Trump, arguing that the ECB was simply using its toolbox to meet its mandated goal of inflation close to 2 per cent, at a time when prices are sluggish around the world. “We don’t target the exchange rate,” he declared.
That position is in keeping with the longstanding view of the G20: targeting your currency for competitive purposes is unacceptable but it is fine to change monetary policy as long as the objective is domestic inflation. The rest of the world had to tolerate dollar weakness when the US Federal Reserve slashed interest rates in the wake of the 2008-09 financial crisis.
The G20’s understanding is that “the impact on the currency is not the objective, it’s the result,” said Masatsugu Asakawa, Japan’s vice-minister of finance for international affairs recently. But maintaining that separation between domestic monetary policy and currency intervention is becoming harder in a world where Washington has launched a trade war against China and there is a revival of interest in currency policy across the political spectrum.
In his trade war with China, Mr Trump has repeatedly raised tariffs on its exports. Thus China’s economy has slowed, a natural consequence of which would be a weakening of the renminbi. But China is under big pressure to limit that. At the recent G20 finance ministers meeting in Fukuoka, Japan, US Treasury secretary Steven Mnuchin appeared to suggest that a failure to support the renminbi could itself be viewed as a sort of manipulation.
Japan is acutely aware that its own aggressive monetary policy and large current account surplus could at some point provoke US ire. Mr Asakawa is at pains to explain that Japan actually has a trade deficit, but a large overall surplus because of revenue from its past investments overseas. His implication — that this is not a surplus Mr Trump should worry about — may or may not find favour with the US president.
Mr Trump’s comments on the dollar have broken the taboo that has long kept US politicians from talking about the currency. During the Clinton, Bush and Obama administrations, even Treasury secretaries seldom spoke of it. By contrast, Elizabeth Warren, a candidate for the Democratic party’s 2020 presidential nomination, has put forward a plan for “more actively managing our currency value to promote exports and domestic manufacturing”.
Actively managing the dollar’s value would blow apart the G20 consensus on avoiding currency manipulation. But a number of experts such as Joseph Gagnon of the Peterson Institute for International Economics and Brad Setser of the Council on Foreign Relations have proposed that the US engage in “counter-intervention” against countries that manipulate their own exchange rates for competitive purposes.
Such a policy would need extensive G20 discussion or it could result in a currency war. For example, if the US counter-intervened against an Asian economy such as Vietnam by buying its currency in exchange for dollars, others such as Japan, the UK and Canada could interpret that as a competitive devaluation against them.
For now, with Mr Trump at the table, the main G20 goal will be to ease trade tensions and maintain the currency status quo. A key moment of this G20 summit will be Mr Trump’s meeting with China’s President Xi Jinping. If it goes well, the Osaka conclave will be viewed as a success. Should the two clash, the summit as a whole will struggle.
One option may be to smuggle past decisions into the communique without making them explicit. In Fukuoka, the finance ministers included a passing line to “reaffirm our exchange rate commitments made in March 2018”.
For Osaka, that may suffice. Yet in the markets and at the conference table, a currencies clash can only be postponed for so long.