The pot calling the kettle black: Mario Draghi takes aim at Trump administration
Mario Draghi, the president of the ECB and architect of one of the biggest currency devaluation experiments in history, took a thinly-veiled swipe at the Trump administration this week, accusing it of breaching an international agreement on currency manipulation.
The war of words followed comments by Steven Mnuchin, the US Secretary of the Treasury, who broke ranks with previous US administrations by declaring that a weak US dollar would help the United States on trade. Asked at a World Economic Forum press conference about the recent weakness in dollar, Mnuchin said:
“A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary reserve currency.”
This statement is not controversial at all; a weaker dollar would make US exports more internationally price competitive.
However, Mnuchin’s comments broke the long-standing tradition of US administrations promoting only a strong dollar. The perceived shift in strategy stoked fears that the US would intentionally weaken the dollar to boost exports as part of its ‘America first’ programme, which sent the greenback to a new 3-year low against a basket of currencies.
The ECB gang were aghast.
Draghi responded by insinuating that the Trump administration had breached an IMF currency manipulation agreement. Speaking at an ECB news conference he said:
Movements in exchange rates that are “justified by the strength of the economy are a fact of nature”, but said some of the recent volatility had been caused by “someone else” whose “use of language … doesn’t reflect the terms of reference that have been agreed.”
The great irony of course is that the comments occurred at an ECB press conference, where Draghi was explaining the decision to continue monetary policy stimulus in the form of quantitative easing.
In short, the policy requires the ECB to buy up huge swathes of long-dated Eurozone government bonds, which forces bond prices higher and suppresses yields (returns). One consequence is that with lower rates of returns, euro-denominated assets become less attractive and the lower demand for euros devalues the currency. In turn this has made Eurozone exports more internationally price competitive and has allowed inflation to be imported from elsewhere.
Devaluing the euro is just one of the transmission mechanisms through which QE works, however it’s clear that the ECB cannot take the moral high ground. Draghi must know this and the fake outrage at Mnuchin for talking down the dollar is ironically an attempt to do the opposite — by suggesting that the current exchange rate does not reflect the strength of the US economy.
The biggest, dirtiest pot is calling the kettle black.
Unfortunately for Draghi his comments compounded matters by pushing the euro higher over the course of the press conference. Any material effect a weak dollar has on the tightening schedule of ECB monetary policy remains to be seen, however the war of words looks set to continue as both men have demonstrated that markets are listening.
