Currency wars ahead

In his first two weeks in the Oval Office, U.S. President Donald Trump rolled out one controversial executive order after another, upsetting his predecessor’s signature healthcare achievement known as Obamacare and the multinational free trade deal Trans-Pacific Partnership, announcing renegotiation of the North America Free Trade Agreement, deregulation and anti-immigration actions. He warned of trade barriers to companies at home and abroad against products made outside the United States and accused China and Japan of “playing the money market” — all consistent with his campaign slogan of redesigning public policy to place “America First.” The actions won’t likely make “America Great Again,” as he assures, but can help revive the U.S. economy at least for the next couple of years.

Before inauguration, Trump complained that a strong dollar was weakening the competitiveness of American enterprises. On Jan. 31, he singled out Beijing and Tokyo for devaluing their currencies while “we sit there like a bunch of dummies.” On the same day, his top trade adviser Peter Navarro accused Berlin of “exploiting” the United States and the rest of the European Union with a “grossly undervalued” euro. The financial markets were rocked by the attacks, sending major currencies northbound.

The Korean currency slipped to 1,130 won against the U.S. dollar from the 1,210 won level late December. Investors dumped the Korean won amid concerns of the U.S. Treasury placing South Korea on a list of currency-manipulating states. The Chinese central bank has raised short-term interest rates and its Japanese counterpart indicated tapering in its quantitative easing program to allow the yen to be revaluated ahead of the looming currency war. German treasury and central bank authorities, on the other hand, suggested its support for the ultra-loose monetary policy of the European Central Bank. But seen overall, Trump’s comments have helped trigger changes in monetary policies around the world that condone weaker domestic currencies.

Trump played a role as president consistent with his business style as a real estate mogul. He debunks customary rules in deal-making.

He chases practicality over theory. In theory, Trumpnomics, or expansionary fiscal policy through tax cuts and infrastructure spending, would accelerate growth in the short term, and at the same time it stokes inflation and the dollar. Moreover, the anticipated increases in U.S. interest rates, which could be as many as three hikes this year, would further fan the strengthening of the dollar.

Trump would be well aware of the contradictory outcome of his policy. He knows exactly what he is doing. He may sound as if favoring a weak dollar, but actually wants a strong dollar to demonstrate the greenback’s predominance as the global reserve currency. The merits from a reserve currency are huge. Printing a $100 note costs just 12.3 cents. But the value of the paper is 813 times the cost because of the world’s belief in it. The seigniorage — or the difference between the value of money and the minting cost — is astronomical.

Washington will likely continue with verbal interventions and actions to uphold the strong dollar as the predominant means for international settlements without having an overvalued dollar.

We must come up with a contingency plan on the currency front. Seoul in October was cited on the U.S. Treasury’s “monitoring” list along with Beijing, Tokyo and Berlin — an inch away from being branded a currency manipulator. Korea could stay safe in the next review in April, given its reduced surpluses with the U.S. after peaking at $25.8 billion in 2015. Washington uses the currency offender list to primarily target Beijing.

Even if we avoid joining the list with China, pressure on the Chinese yuan could directly hit the won. From 2015 to January of this year, the correlation between the two currencies averaged at 0.47. The correlation in the pair rose from 0.76 to 0.87 three months before and after Trump’s election victory. The coupling rate accelerated after Trump was elected. In other words, appreciation in the yuan translates into the same outcome with the won. The volatility in the foreign exchange market would go up because Beijing won’t likely easily yield to Trump’s threats.

Our maneuvering options are limited. Authorities can merely resort to a so-called “smoothing operation” to prevent a sharp swing in the currency. They must be able to prove with data that their intervention is designed to stabilize the local exchange market and not to reverse the trend. At the same time, they must reinforce the foreign exchange reserves. They must do their best to renew the currency swap agreement with China regardless of its backlash over the deployment of the U.S. antimissile system in South Korea. Companies also should beef up their foreign exchange leveraging.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Feb. 11, Page 25

*The author is the president of Hyundai Research Institute.

Kang In-soo