- On 12 April 2017 Trump said that China is not a currency manipulator, contrary to what he had promised during the campaign.
- He added that the dollar is too strong and that he prefers low interest rates, which is unusual for a US president.
- For anyone who earns, pays or invests in dollars, the lesson is that exchange-rate risk also depends on what politicians say.
On 12 April 2017, in an interview with The Wall Street Journal in the Oval Office, US President Donald Trump said that China is not a currency manipulator. During the campaign he had promised to apply that label to Beijing on his first day in office, so the change of stance was notable. According to the newspaper, the reason was twofold: China had not been artificially weakening its currency for months, and a trade clash could complicate its cooperation on North Korea, after the two presidents met in Florida in early April.
In the same interview he said the dollar was getting too strong and that this was partly his own doing, because people have confidence in him. He also said he prefers low interest rates and that he respects Federal Reserve chair Janet Yellen. Markets reacted at once: the dollar and US Treasury yields fell, and Wall Street slipped.
What “manipulator” means
Twice a year, the US Treasury Department publishes a report on the currency policies of its main trading partners. Among other things, it examines whether a country runs a large trade surplus with the United States and whether it intervenes persistently in the market to keep its currency cheap. Calling a country a currency manipulator is a political decision that opens a process of bilateral consultations.
The label does not carry automatic sanctions. Its effect is above all one of signalling, although it can precede trade measures if talks make no progress. That is why what Trump said mattered less for the report itself than for what it revealed about his strategy: giving priority to negotiation with Beijing over direct confrontation, at least for now.
A dollar that is too strong
A strong dollar makes US imports cheaper and its exports dearer, so governments with industrial ambitions tend to view it with suspicion. What is unusual is for a president to comment on it in public. For decades, US leaders have avoided opining on the value of the dollar and on interest rates, precisely so as not to interfere with the independence of the Federal Reserve, which had just raised them in March.
When an authority of that weight comments on a currency, markets read the message as a hint of future policy. One possible reading was that Washington would tolerate, or even want, a weaker dollar and low rates for longer, and the currency lost ground. A single sentence, with no formal decision behind it, was enough to move prices.
What to review
For companies and families with part of their activity or wealth in dollars, the episode is a reminder that exchange-rate risk does not depend on the economy alone: it also depends on statements, elections and negotiations. An exporter paid in dollars sees its euro income fall if the currency drops; an importer of raw materials priced in dollars, such as energy or metals, benefits in that case, and the other way round.
The first step is to know how much exposure there is: receipts, payments, debts and investments in foreign currency, and over what time frames. The second is to check whether hedges are in place, such as forward contracts, and whether their term and amount match those of the transaction they protect. The third is to avoid decisions based on forecasts of where a currency will go, something even experts do not get right consistently. Consult your adviser on how to apply this to your case.
In currencies, one sentence can move more than a data release: know your exposure before the headline arrives.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
