Cur­rency war can only lead to col­lapse of US dol­lar

Global Times US Edition - - BIZCOMMENT - By Hu Wei­jia

The US Fed­eral Re­serve on Wed­nes­day cut its tar­get range for the fed­eral funds rate by 25 ba­sis points (bps), even as the US econ­omy en­joys the long­est ex­pan­sion on record. How­ever, US Pres­i­dent Don­ald Trump can hardly be sat­is­fied with a 25 bps cut, and he’s likely to keep up pres­sure on the Fed for some­thing more sub­stan­tial.

Trump tweeted in May that “it would be game over, we win” if the Fed ever did a “match” to re­duce in­ter­est rates. It’s no se­cret that Trump wants to pump money into the fi­nan­cial sys­tem to sup­port the US econ­omy. Now Trump is very close to wag­ing a cur­rency war, and it seems the Fed can hardly stop him.

Bei­jing is fully pre­pared if Trump seeks a cur­rency war with China. In­ter­est rate cuts are not the only tools at US pol­i­cy­mak­ers’ dis­posal to weaken the US cur­rency. In 1985, the US signed the Plaza Ac­cord with Ja­pan, West Ger­many, France and Bri­tain to ar­ti­fi­cially de­pre­ci­ate its cur­rency against the yen. How­ever, a Plaza Ac­cord-style cur­rency in­ter­ven­tion seems highly un­likely to­day. A cur­rency war is doomed to fail in to­day’s world econ­omy.

Trump doesn’t like the US to have trade deficits. It is un­der­stand­able that he ad­vo­cates a weak dol­lar pol­icy be­cause a de­pre­ci­a­tion of the dol­lar can pump up US ex­ports and thus cut the trade deficit. A cur­rency war might help Trump achieve the goal of re­duc­ing the US trade deficit in the short run, but a rapid de­pre­ci­a­tion will re­sult in a col­lapse of Us-dol­lar de­nom­i­nated credit.

The dom­i­nance of the US dol­lar in the global mon­e­tary sys­tem laid a solid foun­da­tion for the Plaza Ac­cord’s cur­rency in­ter­ven­tion. How­ever, the sit­u­a­tion has changed sig­nif­i­cantly since that time, as the emer­gence of the euro, yen, and yuan as global re­serve cur­ren­cies has bro­ken the dom­i­nance of the US dol­lar in the mon­e­tary sys­tem. If Trump con­tin­ues to drag the US dol­lar into a cur­rency war, a rapid de­pre­ci­a­tion will make the US dol­lar com­pletely lose its dom­i­nant role, which was es­tab­lished by the Bret­ton Woods sys­tem.

The US dol­lar’s ex­or­bi­tant priv­i­lege has long given the US econ­omy ex­tra­or­di­nary lever­age, but now Trump seems to want to give up that priv­i­lege in re­turn for a tem­po­rary trade deficit cut. A cur­rency war will re­sult in a col­lapse of the US dol­lar. China is pre­pared to pre­vent pos­si­ble risks aris­ing from the cur­rency war. The au­thor is a re­porter with the Global Times. bi­zopin­[email protected] glob­al­

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