By William Watts, MarketWatch
Dollar bulls need not fear the U.S. Treasury — and they appear to know it.
White House economic adviser Larry Kudlow on Friday told CNBC that the administration had ruled out intervening in currency markets after a meeting of cabinet officials and economic advisers.
“What the president is concerned about is foreign countries may be manipulating their own currencies lower to try to gain some short-term temporary trade advantage,” Kudlow told the cable news channel. “But it’s not a question of bringing down the dollar.”
The ICE U.S. Dollar Index (IFUS:DXY) , a measure of the U.S. currency against a basket of six major rivals, was up 0.2% at 98.044, leaving it up 0.9% for the week and nearly 2% so far this month. The euro was off 0.2% versus the dollar at $1.112, near a two-year low, after the European Central Bank on Thursday signaled it is prepared to cut rates as early as September and opened the door to additional stimulus measures, including renewed asset purchases.
The British pound (XTUP:GBPUSD) fell 0.6% to $1.2380, in danger of plumbing territory last seen in April 2017 as fears the U.K. could crash out of the European Union without a deal governing its relationship with the bloc have increased following hardline Brexiteer Boris Johnson becoming prime minister this week after winning the Conservative Party leadership contest.
The dollar was up 0.1% versus the Japanese yen (XTUP:USDJPY) at ¥108.72.
CNBC and Politico both reported Friday that White House trade adviser had presented ideas on how to devalue the dollar in an effort to get an upper hand in trade talks with China, but that the proposals were quickly dismissed by President Donald Trump.
The U.S. hasn’t intervened in currency markets since 2011, when it joined in a multilateral effort to stem a rise in the Japanese yen after that country was struck by a devastating earthquake and tsunami.
Analysts have warned that unilateral intervention efforts could create problems of their own. Vassili Serbriakov of UBS noted that if European and Chinese growth improved more than the U.S., then intervention could indeed lead to a sustained dollar selloff.
But the more likely outcome of a currency war would be increased uncertainty, which could ironically prove to be a positive for the U.S. dollar if haven-seeking investors dumped risky assets, like equities, and boosted financial market volatility, he said.
Unilateral U.S. intervention would be likely to prompt a dovish response from the ECB and the Bank of Japan, which would shift interest-rate differentials in the dollar’s favor, albeit with a lag, Serebriakov added.
The specter of U.S. intervention to weaken the dollar had intensified in recent months as Trump repeatedly complained that the weakness of other currencies was putting the U.S. at a disadvantage. Often, the complaints were combined with criticism of the Federal Reserve and Chairman Jerome Powell for past rate increases.
The Fed is widely expected to deliver a quarter-point rate cut when policy makers meet next week.