Mnuchin G-20 Debut Clouded as U.S. Unspools World FX Truce

  • Trump has accused trade-surplus nations of unfair FX moves
  • Treasury, IMF currently don’t designate China a manipulator

How Steven Mnuchin Got the Treasury Job

With President Donald Trump’s Treasury secretary finally in place, finance chiefs around the world have a direct link into an administration not shy about criticizing foreign currency policies.

Group of 20 finance ministers were left in limbo during Trump’s first weeks in power without a counterpart to explain the inward-looking trade policies that the president and his advisers were calling for. Some of those remarks moved markets, with the administration singling out top trading partners China, Japan, Mexico and Germany for running large trade surpluses.

With the arrival of Steven Mnuchin as Treasury chief after Senate approval on Monday, the informal grace period for currency chatter during the start of an administration will start winding down. Habitual talking up and down of currencies could violate a pact to “refrain from competitive devaluations,” which was reaffirmed in the September G-20 communique, or stoke currency wars.

Almost above all, markets and policy makers around the world are waiting for the first move from the Trump administration regarding trade with China -- on which it has vowed to take a tougher stance. Trump as a candidate said he would label China a currency manipulator immediately, although he has walked back. Mnuchin has said he would apply the designation if it’s warranted.

Quicktake: Trumponomics is jawboning by another name

“Exactly how a trade fight with China is likely to start is difficult to determine, but we expect at a minimum that the Treasury department will declare China a currency manipulator” in its next semi-annual exchange-rate policy report due in April, said Stephen Myrow, managing partner at research firm Beacon Policy Advisors LLC in Washington.

While the Obama administration in the October report declined to label China a currency manipulator based on three criteria established by the Treasury, those goalposts can be modified. The International Monetary Fund no longer considers the yuan to be undervalued.

Trump’s administration is considering a new tactic to discourage China from undervaluing its currency that falls short of a direct confrontation, the Wall Street Journal reported, citing people with knowledge of the policy. Under the plan, the Commerce secretary would designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China, the newspaper reported.

Read more: How Trump’s yuan manipulator tag would work

Mnuchin finally taking the helm at Treasury may not offer the kind of clarity markets are looking for given the diverse set of advisers that Trump is leaning on, according to Mark Williams, chief Asia economist at Capital Economics in London.

It’s unclear “whether there is any unified policy” for currency or trade in the administration, he said. “You’d usually expect the Treasury to take the lead, but there are people like Peter Navarro sounding off from the sidelines who Trump may decide to follow instead,” he said, referring to the National Trade Council director.

Policy Clues

Already Trump and his team have dropped some hints about their views on currency policies.

  • Navarro said Germany’s excessive surplus is a sign of a “grossly undervalued” euro, strengthening the currency
  • Commerce Secretary nominee Wilbur Ross sent the peso and the Canadian dollar down after saying that renegotiating trade deals with the respective nations would be a priority
  • Trump and Mnuchin have both talked down the dollar, with the latter causing a sell-off after saying an “excessively strong” dollar could hurt the U.S. economy
  • Trump said China and Japan “play the money market, they play the devaluation market and we sit there like a bunch of dummies.” His meeting with Japanese Prime Minister Shinzo Abe last week appeared to reveal a burgeoning friendship, with the two leaving their deputies to talk about tougher topics such as trade and cooperation

Currency moves on such remarks should not be seen as flukes. Ross has said that declines in the peso and the Canadian loonie were “not an accident” and have helped do some of the “work already that we need to do in order to get better trade deals.”

Wider Support

Mnuchin’s success will rely on how deftly he can navigate Congress -- where he will find bipartisan support to go tough on China -- and how he collaborates with Trump’s other economic advisers keen to make their mark in policy making, like Ross and National Economic Council Director Gary Cohn. Mnuchin will also probably get help from David Malpass, who has served in two Republican administrations and is said to be Trump’s choice for Treasury’s undersecretary for international affairs.

Outside the U.S., Mnuchin will face his first test on global cooperation when he attends the G-20 meeting of finance ministers and central bank governors March 17-18 in Baden-Baden, Germany, which currently chairs the grouping.

“Countries with large bilateral surpluses will indeed face exchange rates where valuations and changes are increasingly politicized,” Alan Ruskin, head of currency research at Deutsche Bank Securities Inc., said, referring to China, Japan, Germany and Mexico.

Mnuchin, in his first public remarks as secretary, said Tuesday during a White House press briefing that sanctions imposed against Venezuelan Vice President Tareck El Aissami on Monday for drug trafficking show that “America stands with” the people of Venezuela. Mnuchin also said, in response to a question about his view of Fed Chair Janet Yellen, that he looks forward to the tradition of regular talks between Treasury and the Fed, and that existing Russian sanctions remain in place.

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