By John McDonald
Despite suggesting earlier this summer that European Central Bank President Mario Draghi would be better in charge of the Federal Reserve than sitting chairman, Jerome Powell, President Trump has recently criticized Draghi for aggressive monetary tightening in Europe.
Draghi had signaled that the ECB could lower interest rates as early as July while speaking at a central-banking forum in Portugal. The euro responded by plummeting in value while global equity markets reacted positively to the news that the ECB might restart its bond-buying program to support the Eurozone economy.
President Trump’s issue with Draghi’s policies came in the form of a tweet in which he noted the ECB president’s remarks had “immediately dropped the Euro against the Dollar, making it easier for them to compete against the USA.”
The president has frequently complained international monetary policies often involve manipulating currency values to make one country’s currency more competitive against the dollar, a practice he believes should be discouraged and prevented when possible.
In the tweet about Draghi’s comments, President Trump continued, “They have been getting away with this for years, along with China and others.”
Draghi appeared unfazed by the criticism, responding publicly in a panel discussion on the same day, “Our mandate is price stability…and we don’t target the exchange rate.” Analysts reacted with concern to the exchange, expressing worries that the Fed and the ECB might engage in a “race to the bottom” complicated by ongoing tariff tensions with China.
Jane Foley, senior FX strategist at Rabobank, observed that a currency war could start innocently enough if multiple countries “suffering from a prolonged bout of undesirably low inflation [and therefore] likely to favor a weak currency find themselves in the same boat coincidentally, the prerequisite conditions for a currency war are set.”
Foley predicted a Federal Reserve move into easing mode would be unlikely to halt dollar strength against other major currencies because other global central banks are also presently leaning toward “easier policy.”
The dollar retains its haven status, which other currencies lack, because of “the liquidity of the greenback and the credibility of the U.S. government and legal system,” she added.
If the Fed moves to cut interest rates, then the dollar might become relatively less overvalued compared to the Euro, but it is unlikely that the euro would ever move even with or overvalue U.S. currency no matter how steep the Fed rate cuts. “Much of the money flowing out of high-risk assets [ends up] in the dollar,” Foley explained.
Most Fed watchers say the ECB and Draghi will not affect a Fed rate cut in any case, with the Fed taking its cues from U.S. economic indicators rather than international financial policy trends.