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By Bilal Hafeez 01-08-2019

U.S. Dollar Policy: Through the Looking Glass of U.S. Currency Intervention (Pimco, 4 min read)

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As we have previously discussed, the US is seeking a weaker dollar given Trump’s export ambitions and hopes for higher growth. Indeed, the dollar is estimated to be 10% overvalued relative to fundamental macro factors. Global Strategist Gene Frieda and US Economist Tiffany Wilding don’t foresee a significant currency intervention, but it’s not impossible. In this article, they explore the conditions under which a currency management policy would be plausible. The US treasury manages the Exchange Stabilization Fund, which whilst only $95 bn in size, has done a successful job of intervention before. This has only been possible with the help of the Fed and international peers. Without the support of the latter, however, there is a risk of a deprecation strategy being perceived as the sole weapon against China and a predictor of further war escalation.

Why does this matter? Previous episodes of intervention were short-lived. Since 1995, only in exceptional circumstances has a US administration resorted to it, so there isn’t much evidence that Trump’s plan would work today.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)