In the week since President Trump decried the strength of the dollar and lambasted China, Europe for manipulating their currencies, the dollar has tumbled to 2-week lows and China’s currency has seen a sudden dramatic shift.
Having said on July 20th that “China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…” the dollar has slumped…
At the same time, The IMF released a lengthy 150-page report, that appeared to support Trump’s claim that Europe has been able to ‘win’ on trade in part because of an undervalued currency.
As Bloomberg reports, the chart below shows Germany’s real-effective exchange rate is weaker than implied by economic fundamentals, with a corresponding outsized current-account surplus. On the flipside, the greenback is stronger than it should be, which contributes to a swelling of the U.S. current-account deficit, suggest staff calculations at the policy lender.
In other words, there may be some truth to the claim trade-weighted currency levels adjusted for inflation are distorted in Germany as well as the U.S.
While the Euro (DEU) is the most under-valued, we note that in the last few days, the Chinese Yuan has seen its collapse stall…
And in fact is now trading the most above its official fix since early May, a very different regime than the last few weeks…
So is Trump winning again? We will see more today after Trump’s meeting with Juncker, where the ‘strong dollar, weak Euro’ is bound to come up.
“The euro is undervalued and the dollar, correspondingly, is one of the most overvalued currencies,” Kit Juckes, strategist at Societe Generale, wrote in a note.
“I wonder if that will come up in the trade conversations today?”
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