Trump flirts with currency war in escalating conflict with China

President Donald Trump on Thursday took a step closer to sparking a currency war in the escalating conflict with China, saying he is not happy with the strong US dollar.

Trump has pursued a policy of maximum pressure, including subjecting all Chinese goods to punitive tariffs as of September 1, and accusing Beijing of manipulating its currency to gain a competitive edge.

In a move that breaks with decades of US policy, Trump seemed to call for a weaker dollar to help American companies compete.

"As your President, one would think that I would be thrilled with our very strong dollar. I am not!" he said on Twitter.

"The Fed's high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing, ... John Deere, our car companies, & others, to compete on a level playing field."

The latest outburst comes days after the US Treasury labeled Beijing a currency manipulator for allowing the yuan to depreciate slightly in the face of new US tariffs.

Economists roundly criticized the move, saying Beijing if anything has been intervening in currency markets to keep the yuan from falling further in the face of an economic slowdown and the uncertainty created by Trump's trade war.

"Labeling China as a manipulator is totally fallacious. They are not manipulating," said C. Fred Bergsten, founder of the Peterson Institute of International Economics.

"It's fake news, as Trump would say," Bergsten told AFP.

But while he said the move stops short of a full blown currency war, the risks are real.

What could trigger a war would be if the administration tries to sell dollars to weaken the exchange rate and Beijing fought back with its own intervention.

"That would constitute a currency war," Bergsten said. "Getting into a currency war would be very risky business. Particularly with this administration, which nobody trusts anyway."

- Leaning against the wind -

For decades, US administrations of both parties have steadfastly advocated keeping the dollar strong since that provides stability and can hold down inflation by making imported goods less expensive.

But a strong currency also makes US exports more expensive. Construction and farm machinery manufacturer Caterpillar recently lowered earnings targets for this year, given declining sales in China amid the tariff battle.

Trump also has been relentlessly pressuring the Fed, demanding it cut interest rates in almost daily tweets.

"With substantial Fed Cuts (there is no inflation) ... the dollar will make it possible for our companies to win against any competition," he said.

US central bankers "have called it wrong at every step of the way," Trump said.

But economists strongly refute this notion and say it is the strength of the US economy compared to others, such as the slowing eurozone, that has pushed up the value of the dollar.

And Trump's own trade war adds to uncertainty that has caused businesses to hold off on investment, and for investors to seek safe havens, including buying US dollars, they say.

In simple terms, "if your economy is stronger than the next guy's economy, you're probably going to have a stronger currency," Fed policymaker James Bullard told AFP this week.

And Bergsten cautioned that any Trump administration bid to weaken the dollar is unlikely to be effective in any case.

"Any effort to weaken the dollar through intervention or anything else would be really leaning against a very strong wind and I don't think there is much prospect for their finding a way to do it."

Bullard, the head of the St Louis Federal Reserve Bank who pushed for the Fed interest rate cut last week, said currency intervention in general "is not that successful against biggest exchange rates."