Bloomberg is reporting this week that the appeal of weaker currencies in the U.S. may lead to “strong countermeasures by rivals.” This reflects the fact that major economies around the globe all seem to covet a weaker currency as risks to growth mount and make engineering a weaker dollar, euro or other heavyweight currency all the harder.
Bloomberg runs down the list. President Donald Trump has repeatedly badgered the Federal Reserve to cut rates and complained that the US dollar is too strong--but he’s got competition. It might not mention the exchange rate explicitly, but the European Central Bank is poised to loosen policies that are “weighing on the common currency,” Bloomberg says.
Bank of Japan Governor Haruhiko Kuroda says the bank will “persistently continue with powerful monetary easing” to boost inflation. In China, the central bank looks set to step up stimulus to revive growth.
The result? Thanks to synchronized monetary easing, any simultaneous moves to weaken currencies might cancel each other out--making “beggar-thy-trading partner” policies a waste of time.
“Everyone is sort of pushing on the same piece of string,” said Charles Diebel, head of fixed income at Mediolanum Asset Management. “If you have the Fed easing and the ECB easing, it’s just a relative game. It’s very hard for currency volatility to remain elevated.”
Despite the Fed’s increasing dovishness, the greenback has beaten most Group-of-10 peers this quarter. The Bank of Korea surprised markets with a rate cut last week, but the won only weakened briefly. Even though the Swiss National Bank keeps reiterating it has leeway to ease, the franc continues to be buoyant against the euro.
Foreign-exchange strategists say the risk of a U.S. move to weaken the dollar has risen after Treasury Secretary Steven Mnuchin said last week that there’s no change in the nation’s currency policy “as of now.”
Bloomberg calls this situation “the latest race to the bottom.” In 2010, when major central banks were printing money and cutting rates, causing their exchange rates to fall, then-Brazilian Finance Minister Guido Mantega famously labeled it a “currency war.” The difference is that back then, the dollar was falling and other countries tried to catch up with it.
Now, the greenback is among the most overvalued G-10 currencies, according to a Bank for International Settlements model on real effective exchange rates.
A desire among policy makers to expand their toolkit to prop up growth is understandable. The International Monetary Fund has revised downward its growth forecast for 2019 repeatedly--including last week--as trade and geopolitical tensions threatened to damp the world economy. Major central banks, including those in Switzerland and Australia, are sticking to a low-rates policy.
“If the U.S. wants a weaker dollar now, they are going to struggle to get that with just the use of monetary policy,” said Kit Juckes, a strategist at Societe Generale SA. “Fed policy is no longer the driver of the dollar--growth is. A rate cut by the Fed isn’t going to get the euro stronger if the prospect of growth there is weak.”
Any competitive devaluations are naturally fraught with political tensions, while prolonged low interest rates risk asset bubbles and financial repression, Bloomberg says.
Some experts see this development as a U.S.-Europe story, including Stephen Jen, the chief executive officer of Eurizon SLJ Capital. He reckons the BOJ has already done so much easing that it is now worried about the economic effects of sustained negative rates. Meanwhile, the People’s Bank of China may refrain from enacting a large stimulus amid fears it could destabilize the economy over the long haul.
“It’s really the euro and the dollar racing lower,” Jen said in an interview. “The Fed doesn’t really have a strong case to cut at all as the U.S. economy is doing fine. The real issues are happening outside the U.S. That’s a very different situation than the Europeans face. They are facing weakness right there in Germany.”
Markets expect the Fed to announce a 25-basis-point cut in interest rates next week. Despite that, the euro depreciated 1.7% against the dollar this quarter, and is down 2.5% this year.
So, we will see what happens, especially regarding the extent of dollar “weakness” as the U.S. policy changes and trading partners react. These may well be more muted than many US officials expect—and should watched closely as they appear, Washington Insider believes.
Welcome
Wednesday, July 24, 2019
US-China Trade Talks Set To Take Place in Shanghai Next Week
U.S. trade negotiators will reportedly travel to Shanghai, China this Monday for the first round of face-to-face talks since last month's G20 summit in Osaka, Japan.
U.S. Trade Representative (USTR) Robert Lighthizer and Treasury Secretary Steven Mnuchin will lead the US delegation, while Vice-Premier Liu He and Commerce Minister Zhong Shan will head up the Chinese side.
The face-to-face meeting came after concessions were recently announced by both U.S. and China. The U.S. said it would offer exemptions from import tariffs for 110 Chinese products. Meanwhile, China said companies will soon purchase US agricultural products after being granted exemptions from duties imposed by Beijing.
U.S. Trade Representative (USTR) Robert Lighthizer and Treasury Secretary Steven Mnuchin will lead the US delegation, while Vice-Premier Liu He and Commerce Minister Zhong Shan will head up the Chinese side.
The face-to-face meeting came after concessions were recently announced by both U.S. and China. The U.S. said it would offer exemptions from import tariffs for 110 Chinese products. Meanwhile, China said companies will soon purchase US agricultural products after being granted exemptions from duties imposed by Beijing.
White House and Congress Reach Spending Deal
The White House and Congress reached a budget deal consisting of $2.7 trillion in spending for Fiscal Years (FY) 2020 and 2021. The agreement would increase overall spending by around $50 billion for FY 2020.
The agreement would authorize spending levels around $320 billion more than limits set under the 2011 sequester, which established mandatory cuts. It would also suspend the debt ceiling until July 2021 – after the 2020 elections.
Savings of around $77 billion would be achieved through small spending reductions for Medicare after FY 2027 and fees collected by Customs and Border Protection (CBP), with both helping to offset the cost of the package. The Trump administration had originally sought $150 billion in spending offsets but faced opposition on that front from House Speaker Nancy Pelosi, D-Calif.
The agreement must still be passed by both houses of Congress and signed by President Donald Trump. Pelosi and Sen. Chuck Schumer, D-N.Y., both pledged to quickly bring the deal to a floor vote, and Senate Majority Leader Mitch McConnell, R-Ky., said he intends to hold a floor vote on the package before the August recess.
The agreement would authorize spending levels around $320 billion more than limits set under the 2011 sequester, which established mandatory cuts. It would also suspend the debt ceiling until July 2021 – after the 2020 elections.
Savings of around $77 billion would be achieved through small spending reductions for Medicare after FY 2027 and fees collected by Customs and Border Protection (CBP), with both helping to offset the cost of the package. The Trump administration had originally sought $150 billion in spending offsets but faced opposition on that front from House Speaker Nancy Pelosi, D-Calif.
The agreement must still be passed by both houses of Congress and signed by President Donald Trump. Pelosi and Sen. Chuck Schumer, D-N.Y., both pledged to quickly bring the deal to a floor vote, and Senate Majority Leader Mitch McConnell, R-Ky., said he intends to hold a floor vote on the package before the August recess.
Tuesday, July 23, 2019
Washington Insider: EU Counts on US Elections to Constrain US Trade Policy Options
Bloomberg is reporting this week that some European Union officials think that the threats of U.S. tariffs on Europe’s auto industry and other measures are “very much alive,” but that the U.S. President will be less trigger-happy the closer he gets to the 2020 election. The logic is that he’d risk a voter backlash if the EU retaliated by targeting U.S. exports, notably farm products.
At this time, the “awkward EU-U.S. truce” is held together by the prospect of a big trade accord in the future. To preserve the status quo, one EU proposal would “slow-walk the negotiations,” pushing them deeper into the campaign on the expectation that the administration will be too focused on his re-election to escalate tensions with Europe.
In order to convey the impression that talks are moving forward, the EU would make limited concessions on peripheral issues such as aligning regulatory standards, Bloomberg said. The bigger goal is a reset of trans-Atlantic relations after the election--effectively a high-stakes diplomatic bet.
Bloomberg argues that the strategy carries an element of risk as Trump could always defy expectations and turn up the heat on the EU just as the election nears unleashing more protectionist measures in a bid to play to his core voters.
Still, this proposal is seen as one among a range of options floating around Europe now and while it is not official EU policy, it coincides with a delicate transition at the EU’s power center, Bloomberg says.
Incoming European Commission President Ursula von der Leyen, an ally of German Chancellor Angela Merkel, is signaling she won’t back off the EU’s forceful strategy of defending its commercial interests and upholding the global trading order.
Von der Leyen’s plan is “to convince our friends from the U.S. that it’s better to find a good compromise and work together,” she told Bloomberg recently.
In the past, the U.S. has shown a “willingness to use a variety of mechanisms in an attempt to reduce its trade deficit,” and has already hit the EU with tariffs on steel and aluminum exports; punitive measures were based on an obscure Cold War-era law that gives the president latitude to impose levies on grounds of national security--a justification rejected by the EU.
The EU retaliated with tariffs on about $3.1 billion of politically sensitive U.S. goods from motorcycles to bourbon. However, that barely scratches the surface of what the conflict could escalate into, Bloomberg says.
The President has until November to decide whether to impose duties of as much as 25% on $350 billion in cars and car parts brought into the U.S. each year exceeding the tariffs imposed on $250 billion worth of Chinese imports. The EU has earmarked $22 billion of U.S. products to retaliate against.
The U.S. has readied a separate list of tariffs on $25 billion of EU goods, of which it expects to hit $11 billion in retaliation for illegal subsidies the bloc provided to Toulouse, France-based Airbus SE. The Trump administration is waiting for the World Trade Organization to rule as early as this summer on the amount of damages. The EU has a similar case pending against Boeing Co. and has readied retaliatory tariffs.
U.S. Trade Representative Robert Lighthizer has indicated that Washington could impose retaliatory tariffs or other trade limits on France or any other country that taxes digital revenues of large companies, which would hit tech giants from Facebook Inc. to Alphabet Inc.’s Google.
Some European officials view the U.S. tariff threats as an effort to force EU countries to include agriculture in the trade negotiations, which began after Trump and European Commission President Jean-Claude Juncker met at the White House last year.
The EU plan hinges on the extent to which Trump perceives that he needs to keep core voters in U.S. farm states happy, even as they feel the brunt of the trade conflict. China’s retaliatory tariffs on U.S. farm goods have dented agriculture incomes and disrupted global trade flows, pushing American farmer sentiment to the lowest levels of his presidency, Bloomberg says.
In Washington, the two sides agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods,” then disagreed in public about what was said.
EU Trade Commissioner Cecilia Malmstrom said after the meeting last July that she was in the room and the outcome, “without doubt,” was “that agriculture would not be in.”
U.S. Ambassador to the EU Gordon Sondland has said the EU “misrepresented” the discussion. Juncker explicitly said agriculture would be included in the negotiations but that it would be left out of the public statement after the talks to provide the EU political cover, Sondland said.
The EU is an extremely tough negotiator and has protected its highly intrusive policies for decades against U.S. pressures—and the U.S. already has a major fight going with China, although it seems to have great confidence in its reliance on tariffs to gain access. Clearly, this is another battle producers should watch closely as it proceeds, Washington Insider believes.
At this time, the “awkward EU-U.S. truce” is held together by the prospect of a big trade accord in the future. To preserve the status quo, one EU proposal would “slow-walk the negotiations,” pushing them deeper into the campaign on the expectation that the administration will be too focused on his re-election to escalate tensions with Europe.
In order to convey the impression that talks are moving forward, the EU would make limited concessions on peripheral issues such as aligning regulatory standards, Bloomberg said. The bigger goal is a reset of trans-Atlantic relations after the election--effectively a high-stakes diplomatic bet.
Bloomberg argues that the strategy carries an element of risk as Trump could always defy expectations and turn up the heat on the EU just as the election nears unleashing more protectionist measures in a bid to play to his core voters.
Still, this proposal is seen as one among a range of options floating around Europe now and while it is not official EU policy, it coincides with a delicate transition at the EU’s power center, Bloomberg says.
Incoming European Commission President Ursula von der Leyen, an ally of German Chancellor Angela Merkel, is signaling she won’t back off the EU’s forceful strategy of defending its commercial interests and upholding the global trading order.
Von der Leyen’s plan is “to convince our friends from the U.S. that it’s better to find a good compromise and work together,” she told Bloomberg recently.
In the past, the U.S. has shown a “willingness to use a variety of mechanisms in an attempt to reduce its trade deficit,” and has already hit the EU with tariffs on steel and aluminum exports; punitive measures were based on an obscure Cold War-era law that gives the president latitude to impose levies on grounds of national security--a justification rejected by the EU.
The EU retaliated with tariffs on about $3.1 billion of politically sensitive U.S. goods from motorcycles to bourbon. However, that barely scratches the surface of what the conflict could escalate into, Bloomberg says.
The President has until November to decide whether to impose duties of as much as 25% on $350 billion in cars and car parts brought into the U.S. each year exceeding the tariffs imposed on $250 billion worth of Chinese imports. The EU has earmarked $22 billion of U.S. products to retaliate against.
The U.S. has readied a separate list of tariffs on $25 billion of EU goods, of which it expects to hit $11 billion in retaliation for illegal subsidies the bloc provided to Toulouse, France-based Airbus SE. The Trump administration is waiting for the World Trade Organization to rule as early as this summer on the amount of damages. The EU has a similar case pending against Boeing Co. and has readied retaliatory tariffs.
U.S. Trade Representative Robert Lighthizer has indicated that Washington could impose retaliatory tariffs or other trade limits on France or any other country that taxes digital revenues of large companies, which would hit tech giants from Facebook Inc. to Alphabet Inc.’s Google.
Some European officials view the U.S. tariff threats as an effort to force EU countries to include agriculture in the trade negotiations, which began after Trump and European Commission President Jean-Claude Juncker met at the White House last year.
The EU plan hinges on the extent to which Trump perceives that he needs to keep core voters in U.S. farm states happy, even as they feel the brunt of the trade conflict. China’s retaliatory tariffs on U.S. farm goods have dented agriculture incomes and disrupted global trade flows, pushing American farmer sentiment to the lowest levels of his presidency, Bloomberg says.
In Washington, the two sides agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods,” then disagreed in public about what was said.
EU Trade Commissioner Cecilia Malmstrom said after the meeting last July that she was in the room and the outcome, “without doubt,” was “that agriculture would not be in.”
U.S. Ambassador to the EU Gordon Sondland has said the EU “misrepresented” the discussion. Juncker explicitly said agriculture would be included in the negotiations but that it would be left out of the public statement after the talks to provide the EU political cover, Sondland said.
The EU is an extremely tough negotiator and has protected its highly intrusive policies for decades against U.S. pressures—and the U.S. already has a major fight going with China, although it seems to have great confidence in its reliance on tariffs to gain access. Clearly, this is another battle producers should watch closely as it proceeds, Washington Insider believes.
Chinese Firms Request Exemptions From Tariffs On US Ag Products
First rumored late last week, Chinese state media now reports that Chinese firms are asking for tariff exemptions to buy U.S. ag products. Several Chinese companies want to purchase U.S. ag products and have applied for exemptions from the duties imposed on them by Beijing, state media reported.
The filed exemptions will now be heard by a panel of experts from the government, Xinhua reported Sunday. No companies or products were detailed.
The report noted President Trump's promise to suspend imposition of new tariffs on Chinese good and allow U.S. firms to sell products to relevant Chinese companies,” a likely reference to telecom giant Huawei.
The filed exemptions will now be heard by a panel of experts from the government, Xinhua reported Sunday. No companies or products were detailed.
The report noted President Trump's promise to suspend imposition of new tariffs on Chinese good and allow U.S. firms to sell products to relevant Chinese companies,” a likely reference to telecom giant Huawei.
US Presses Dispute Settlement Transparency at WTO
The U.S. urged fellow World Trade Organization (WTO) members to voluntarily increase transparency in the dispute settlement process, in a long statement delivered during the July 22 meeting of the WTO Dispute Settlement Body (DSB).
The issue of transparency is "critical for the legitimacy of the WTO," the U.S. said. It urged other members to follow the lead taken by the it, European Union (EU), Australia, Japan and others and voluntarily make their dispute settlement hearings and submissions public.
Nothing in WTO rules prevents members from increasing dispute settlement transparency, so "members cannot defend the lack of transparency on this basis," the U.S. remarked.
"The continued lack of transparency is simply untenable and threatens to further erode public support for and, ultimately the viability of, this system that members profess to support," the U.S. concluded. It pressed fellow members to "immediately take steps in each dispute in which it is participating to request to make its statements publicly observable and to make its written submissions publicly available."
The issue of transparency is "critical for the legitimacy of the WTO," the U.S. said. It urged other members to follow the lead taken by the it, European Union (EU), Australia, Japan and others and voluntarily make their dispute settlement hearings and submissions public.
Nothing in WTO rules prevents members from increasing dispute settlement transparency, so "members cannot defend the lack of transparency on this basis," the U.S. remarked.
"The continued lack of transparency is simply untenable and threatens to further erode public support for and, ultimately the viability of, this system that members profess to support," the U.S. concluded. It pressed fellow members to "immediately take steps in each dispute in which it is participating to request to make its statements publicly observable and to make its written submissions publicly available."
Still No EU/U.S. Trade Talks a Year Later
Politico says it’s been almost a year since the U.S. and the European Union struck a temporary truce in transatlantic trade tensions. However, there seems to be little left in the new phase of trade relations as no trade talks have started. EU trade boss Cecilia Malmstrom has said the U.S. will likely slap retaliatory tariffs on $25 billion worth of European imports. It’s part of a dispute that began because of airline subsidies. Washington has also started an investigation into a digital services tax in France. Several EU officials are also warning that President Trump will soon carry out a longstanding threat to impose auto tariffs, possibly as soon as November. The EU Commission’s second-highest ranking trade official will be in Washington through today (Tuesday) for meetings with Deputy U.S. Trade Representative Jeff Gerrish and other key players in the Washington trade community. Earlier this year, Trump had agreed to hold off on his plan to impose new tariffs on European Union imports while the two sides worked to avoid a full-blown trade war. In announcing the cease-fire, the two sides said they had agreed to remove all non-auto tariffs, increase cooperation on energy purchases, as well as work together to help reform the World Trade Organization.
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