Three Takeaways From The Treasury’s April FX Report

It is highly likely that the Treasury had the intent to signal discontinuity from the previous administration by switching to a more gradual approach to the manipulator designation, stressing how meeting all three criteria does not (or at least no longer) automatically imply that a country will be labelled a manipulator.

From a forward-looking perspective, there is a possibility that this report signals a transition from a quantitative criteria-based approach to addressing foreign FX practices. Even before the release, media reports suggested an ongoing discussion in the Treasury to review the criteria and the quantitative thresholds.

Indeed, there is also a possibility that sparing Switzerland, Vietnam and Taiwan from the the manipulator tag was due to the out-of-the-ordinary nature of the pandemic situation and its distortive impact on global trade flows in 2020 (the Treasury did highlight that in the report), and that the Treasury has no plans to change the criteria-based approach.

But what appears clear is that the Treasury will hardly continue to give the same weight to the three criteria, and more focus should be on actual FX intervention rather than the current account and trade data. In the summary table included in this edition of the FX Report, FX intervention was reported in the first column, rather than the third one as in previous reports, pointing to the bigger weight this is set to have in the future.

3 Yellen may have to compensate for having sent the wrong message

While a more gradual approach to the manipulator designation is indeed suitable – if nothing else because of the pandemic emergency – this edition of the FX Report may have conveyed a message that is in contrast with the pledge by Secretary Yellen to tackle FX mispractices.

Indeed, failing to use the manipulator tag for the three countries that meet the criteria may be read by some as a transition to a lighter-touch approach by the new administration.

This may ultimately cause some countries to be more comfortable when intervening to curb their domestic currencies’ appreciation for trade advantages, which could become a dominant theme as global trade rebounds from the pandemic crisis and a resumption of the dollar downtrend (which is our base-case) offers room for emerging market currencies to appreciate.

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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