Trump Cannot Wage Both A Trade War And Currency War Against China Dollar To Sgd Exchange Rate

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Trump Cannot Wage Both A Trade War And Currency War Against China

U.S. President Donald Trump speaks on July 26 at U.S. Steel's Granite City Works plant in Granite City, Illinois. (Photo: Whitney Curtis/Getty Images)

’s trade war has increased global economic uncertainty, this has rendered American exports even less competitive Dollar To Sgd Exchange Rate , not the least of which the Chinese yuan. Effectively, this has rendered American exports even less competitive, while neutering much of the intended effect of Trump’s new tariffs on making foreigner’s exports to America more expensive. Predictably, an irate Trump tweeted that the Chinese and Europeans are manipulating their currencies to hurt America. While he was at it, he also criticized the Federal Reserve’s interest rate increase, which pushed up the exchange value of the U.S. dollar. It appears that in order to make his trade war work, Trump is gearing up to launch a currency war as well.

Is China manipulating its currency? Let’s take a closer look at the facts. Since 2016, China’s central bank, the People's Bank of China (PBOC), has managed the yuan’s exchange rate with a trade weighted index of a basket of 25 currencies comprising of China’s biggest trading partners. The currencies that have the most weight in the basket are the U.S. dollar, the euro, the Japanese yen, the British pound, the South Korean won, Dollar To Sgd Exchange Rate , the PBOC effectively has allowed market forces to play a leading role in determining the exchange rate of the yuan.

In spite of the recent sharp fall in the value of the yuan, the PBOC has stayed on the sideline without intervening (apart from oral guidance warning speculators not to short the yuan). This is in sharp contrast with its response to the yuan’s depreciation in 2015 and '16 when it intervened aggressively, both to stabilize the yuan and to “punish” speculators. In a detailed analysis of the daily trading data in June and July this year, analysts at

that the yuan’s depreciation has indeed been driven by market forces. The really big story today about the Chinese currency is how little the PBOC has intervened.

The lack of evidence is consistent with the lack of motive. As China becomes less dependent on low-value-added exports Dollar To Sgd Exchange Rate , a weak yuan is no longer an advantage. In fact, President Xi’s Made in China 2025 program aims to upgrade key Chinese industries such that they can compete globally with the best not because they are cheap, but because they are qualitatively good. In this context, a weak yuan is actually counter-productive as it prolongs the viability of low-value-added exports.

In the absence of market manipulation, the fact is that virtually all major currencies (including the 25 in the basket that China uses as the exchange index for the yuan) have depreciated against the U.S. dollar. No surprise therefore that the yuan depreciated against the U.S. dollar. Why is it that the U.S. dollar is appreciating in the midst of a U.S.-originated trade war?

This is because the U.S. dollar remains the only truly viable reserve currency in the global economy today. Any increase in global economic uncertainty prompts investors to pull their money out of currencies that they fear could become volatile and illiquid. In the past, some of that money would have gone into the strong economies in Europe like Germany. With the single currency, Europe is no longer the attractive safe haven that it was. This then leaves the U.S. dollar as the safe haven of the last resort. The paradox, therefore, is that while the U.S. is ratcheting up global economic uncertainty, money rushes into the U.S. dollar, strengthening its exchange rate.

Domestic conditions are also supporting the U.S. dollar appreciation. Trump’s criticism notwithstanding, in raising interest rate the Federal Reserve is only reacting to prospects of higher inflation, driven by full employment, rising (some would say out of control) fiscal deficit, higher import prices due to the Trump tariffs, and high oil prices. With the expectation that the Federal Reserve will need to tighten monetary policy further and faster, the U.S. dollar in turn becomes more attractive.

There is an intricate connection between global economic uncertainty and the strength of the U.S. dollar, the understanding of which seems to have eluded President Trump. He can keep on waging his trade war, but he will have to put up with a stronger U.S. dollar that could neuter the impact of his tariffs. Or he can try to halt the dollar’s appreciation by backing off from his trade war brinkmanship. But he cannot do both.

I am currently Global Chief Economist and Chair of the Academic Advisory Council at Mastercard Inc.In 2019, I will also join the Lee Kuan Yew School of Public Policy at the National University of Singapore as Senior Fellow. I was the HSBC Visiting Professor of Internat...