by Max Fox, Member American German Business Club Berlin. The views expressed are his own.
The newly appointed executive administration in the United States has been using the term “Currency Manipulator” rather often recently, usually to describe the central banks of China and Japan. In 2015, the United States Treasury passed an act, the Trade Facilitation and Trade Enforcement Act of 2015. This act provides criteria for officially labelling other countries as Currency Manipulators.
“The 2015 Act requires that Treasury undertake an enhanced analysis of exchange rates and externally ‐ oriented policies for each major trading partner that has: (1) a significant bilateral trade surplus with the United States, (2) a material current account surplus, and (3) engaged in persistent one ‐ sided intervention in the foreign exchange market. Pursuant to the 2015 Act, Treasury has found in this Report that no economy satisfied all three criteria.”
-Dept of Treasury Foreign Exchange Report on the Major Trading Partners of the United States
The Bank of Japan last intervened in the Foreign Exchange market on October 31, 2011 when the value of the Yen was weakened from 75.72 to 77.97 Yen per Dollar, a 3% devaluation. As you can see in the chart below, the move made by the intervention was a significant one day event, but had little lasting effect, and pales in comparison to the market based Yen devaluation that occurred the following February and March which saw the Yen fall from 76.11 to 83.78 Yen per Dollar, a 10% devaluation driven by the open market.
Currency manipulation, as defined as direct intervention in currency markets, in reality, has a poor track record of lasting effectiveness. The Swiss National Bank has been the most persistent currency manipulator in the recent past. From September 2011, to January 2015, the SNB engaged in a program to put the brakes on the increase in the value of the Swiss Franc in relation to the Euro currency which is used by all of its immediately neighbouring countries. The goal of this program was to not allow the EUR/CHF exchange rate to trade below 1.20 Franc per Euro at any time, and the SNB stated they would “buy foreign currency in unlimited quantities” to that end.
This policy required the SNB to accumulate 495 Billion Francs worth of foreign currency, a record sum for the SNB, which if they wanted to sell back to the open market, it would strengthen the Franc even further. On January 15, 2011, the SNB announced the removal of the 1.20 EUR/CHF floor policy, the market set the true value of the Euro against the Franc at a much lower rate which proved a very disruptive move, dropping the EUR/CHF from 1.2000 to 1.0280 in one day, a 14.33% increase in the value of the Franc against the Euro.
The President is reported as saying China and Japan “play the money market, they play the devaluation market, and we sit there like a bunch of dummies.” What exactly the “Devaluation Market” is was not clarified. If a trading partner does indeed at some point fulfil the criteria as a currency manipulator the President will be directed to ask them to stop doing it and correct the imbalances and behaviours outlined in the 2015 act. If they do not stop, he will have the right to open trade talks, ask the IMF to outline a correctional program for the offending country, and other such penalties.
Although in reality there are many other ways of “manipulating” or affecting a currency, such as the Quantative Easing program carried out by the Federal Reserve until 2014, direct and persistent intervention in the currency market is required to fulfil the criteria of the Treasury Department, and officially label a trading partner as a currency manipulator. And nobody is doing much of that right now.
If the White House wants the right to label trading partners as “Currency Manipulators” with different criteria than what is in the 2015 Act, they will need to talk to congress about amending the mandate of the Treasury Department. Otherwise, the currency manipulator title will remain one based on behaviour and data, and not the subjective opinion of those in elected or appointed office spouting off in hope of a good sound bite.