Here’s what to expect in currency war
WASHINGTON — President Donald Trump’s trade conflict with China escalated this week when Beijing let its currency fall to its lowest level against the dollar in 11 years and suspended its purchases of U.S. farm goods — and the Trump administration promptly branded China a “currency manipulator.”
Trump’s response has little immediate practical impact. But together, the new developments raised the dangerous threat of a destabilizing currency war that could infect the global financial system. The stock market responded on Monday with its steepest plunge of the year.
Things cooled a bit on Tuesday when China appeared to stabilize its currency, and the Dow Jones Industrial Average rebounded 311 points. But that was still less than half its loss on Monday. President Donald Trump, left, and President Xi Jinping of China talk in Osaka, Japan, on June 29. Trump has not lowered the dollar against the yuan, but media reports say it was discussed in the White House last month.
currencies to try to gain a competitive edge over each other. A cheaper currency typically makes a nation’s exports more affordable for foreigners — and makes imports more expensive. This action tends to protect a country’s manufacturers, in particular, from foreign competition.
For now, no. The Trump administration has yet to respond to China’s allowing its currency to fall by taking its own steps to lower the dollar’s value to the yuan. Still, this could happen: The option was raised in
the White House late last month, according to media reports, and Trump said July 26 that he could take steps to devalue the dollar “in two seconds if I want to.”
And earlier that month, Trump had tweeted that China and Europe were “playing (a) big currency manipulation game” and the U.S. either “should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games.”
Megan Greene, an economist and senior fellow at Harvard’s Kennedy School of Government, suggested that the Trump administration might decide to lower the dollar’s value to retaliate against China simply because it has few other options. Still, she doesn’t think the move would prove effective, partly because the yuan isn’t widely available on currency markets. It would be hard for the U.S. to buy enough yuan to drive up its value against the dollar.
“It seems like some kind of currency intervention is on the table, just not an effective one,” Greene said.
Over time, it would be significant. For China, driving the yuan lower would make it harder for its companies to pay off their dollardenominated debts, because each yuan they earn would translate into fewer dollars. In both countries, cheaper currencies generally raise the price of imports, which could spur inflation. That would also make Chinese imports costlier for American consumers.
“For the U.S. to intervene to try to weaken the dollar would be a terrible mistake,” said Sung Won Sohn, business economist at Loyola Marymount University in Los Angeles.