We live in a bizarro world where the ECB, Japan, Turkey, and China - which explicitly manipulate their currencies for economic and political reasons - do not "manipulate" their currencies... but Vietnam and Switzerland do. At least that's the opinion of the Treasury's Department which spared China the currency manipulator label again but in its semi-annual currency manipulation report found that Switzerland and Vietnam were "currency manipulators" and added three new names to a watch list of countries it suspects of taking measures to devalue their currencies against the dollar.
In what Reuters said "may be one of the final broadsides to international trading partners delivered by the departing administration" the Treasury said that through June 2020 both Switzerland and Vietnam had intervened in currency markets to prevent effective balance of payments adjustments, and that Vietnam had acted to gain “unfair competitive advantage in international trade as well.” That was not a surprise, with foreign exchange analysts broadly expecting the designation for the two countries which are scapegoats for the Treasury's inability to name the real manipulators out of purely political reasons.
"Treasury will follow up on its findings with respect to Vietnam and Switzerland to work toward eliminating practices that create unfair advantages for foreign competitors,” Treasury Secretary Steven Mnuchin said in a statement released Wednesday in Washington. The document scrutinizes the currency practices of 20 countries for potential manipulation over the four quarters through June.
The Treasury said Vietnamese authorities reported to the US that they had made net purchases of foreign exchange of $16.8 billion over the four quarters through June, equivalent to 5.1% of gross domestic product. The agency called for greater transparency in managing the dong, and the modernization of monetary tools so the country can rely less on currency intervention. Vietnam should also reduce trade barriers to allow a level playing field for American firms and workers, the Treasury said.
Meanwhile, “Switzerland conducted largescale one-sided intervention, significantly larger than in previous periods, to resist appreciation of the franc and reduce risks of deflation,” the agency said, which is ironic because in order to weaken its currency, the SNB is buying US stocks, which is directly benefiting the US economy. Ah, the paradoxes of today's centrally planned world.
While noting that financial markets were volatile, the Treasury concluded that at least some of the Swiss intervention “was for purposes of preventing effective balance of payments adjustments.” The agency suggested the Swiss National Bank look at “domestic quantitative easing” to help balance its monetary policy mix.
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To be labeled a manipulator, countries must at least have a $20 billion-plus bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of gross domestic product and a global current account surplus exceeding 2% of GDP. It was the first time for Switzerland and Vietnam to be labeled as manipulators. Each met all three of the criteria, while China met one of the three.
The action comes as the global coronavirus pandemic skews trade flows and widens U.S. deficits with trading partners, an irritant to Trump, who won office four years ago partly on a promise to close the U.S. trade gap.
Meanwhile, the Treasury stopped short of labeling China a currency manipulator and instead kept the world’s second-largest economy on a watchlist. The Treasury urged China to “improve transparency” in its currency management, especially of its central bank’s relationship with state-owned banks. Others on the list include Japan, Korea, Germany, Italy, Singapore and Malaysia. The U.S. Treasury also said its “monitoring list” of countries that meet some of the criteria has grown to 10 with the additions of Taiwan, Thailand and India.
The U.S. Treasury report also said that India and Singapore had intervened in the foreign exchange market in a “sustained, asymmetric manner” but did not meet other requirements to warrant designation as manipulators
Countries that meet two of the three criteria are placed on the watchlist. The U.S. has previously made the manipulation designation twice - for China both times - in the 1990s and in August 2019. As Bloomberg reminds us, in January Mnuchin lifted a manipulation charge on Beijing -- just two days before the U.S. and China signed a long-awaited trade agreement.
Wednesday’s release was the first semiannual foreign exchange report this year. The Treasury’s first report was officially due in April, but was delayed initially because of the coronavirus pandemic. A second one was due in October.