US President Donald Trump broke with decades of policy by calling for a weaker US dollar (SAUL LOEB)

Washington (AFP) – 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 on Thursday 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.

If the administration tries to sell dollars to weaken the exchange rate and Beijing fights back with its own intervention, that could trigger a war, he said.

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

– Leaning against the wind –

William Reinsch, a trade expert and former congressional advisor, warned of the risks of weaponizing currencies, something done in the early 1930s, that exacerbated the Depression.

“The worst thing that can happen is we get into one of these cycles of competitive devaluation,” he told AFP.

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.

Reinsch, of the Center for Strategic and International Studies, said Trump has painted himself into a corner and his hardline tactics with China make a deal less likely.

“He really is in a kind of a box, because they’re not going to do what he wants and there’s not an easy way out,” he told AFP.

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 on Twitter. 

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 like 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.

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.”

Disclaimer: Validity of the above story is for 7 Days from original date of publishing. Source: AFP.