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GBP USD, EUR USD Exchange Rates Would Fly on a Trump-Controlled Fed

Much has been said on Exchange Rates UK about the fears surrounding the US administration’s desire for a weaker US dollar, and the impact those fears have had on USD exchange rates. I refer here specifically to comments made within the past month by Donald Trump, Treasury Secretary Steven Mnuchin and trade advisor Peter Navarro.

In the past two weeks, however, in commenting on the likeliness of a reversal in the broader US dollar uptrend, several banks (most notably Goldman Sachs) have said that they believe a weaker dollar is unachievable – that in fact, US economic fundamentals will drive the dollar throughout 2017 and 2018, not Donald Trump.

Yesterday, Commerzbank painted an interesting long-term scenario in which Trump can keep the US dollar from further appreciation, and furthermore, force the Federal Reserve to actively intervene in FX markets to weaken the currency.

As of 11:49 GMT, Friday, the pound-dollar and euro-dollar pairs are trading at 1.2418 and 1.0645 respectively, down 0.53% and up 0.1% on the week.

EUR to USD exchange rate chart

No Weak Dollar Without the Federal Reserve

In the US the Treasury has control over the exchange rate policy rather than the US central bank.

This means that if Donald Trump is serious in his desire for a weaker US dollar, he could simply ask Treasury Secretary Steven Mnuchin to instruct the Federal Reserve to intervene in the foreign exchange markets to weaken the currency. This would be achieved using the Treasury’s Exchange Stabilization Fund (ESF).

The problem here is that the US Treasury can only instruct the Fed to intervene with the funds available in the ESF. And unfortunately those funds are comparatively limited (approximately USD 90bn). And this limitation makes currency interventions only effective if the Fed also uses its own funds. To this end, the central bank can print unlimited amounts of US dollars and sell them on the market.

The lesson here, according to Commerzbank analyst Thu Lan Nguyen, is this: If Trump’s administration wants to weaken the dollar it will depend on the complete cooperation of the Federal Reserve.

It is important to remember here that, currently, the intentions of the Trump administration and those of the Fed are pointing in completely different directions, with the Fed due to raise rates again at an upcoming meeting – an action that is clearly dollar supportive and would further frustrate President Trump.

Commerzbank describe the Fed as being on a potential “collision course” with the US government.

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