US President Donald Trump’s tweet attacking bitcoin (BTC-USD) highlights his increasing interest in controlling global currency markets — an interest that could create a “new world order” in foreign exchange.
Trump last Thursday attacked cryptocurrencies such as bitcoin and Facebook’s (FB) Libra, saying in a tweet that they are “highly volatile and based on thin air.”
While the global press immediately jumped on Trump’s first public mention of cryptocurrencies, what went largely unnoticed was a follow-up tweet.
“We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable,” the President tweeted. “It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!”
Trump’s interest in bitcoin and reassertion of the dollar’s dominance highlights the President’s increasing interest in currency markets. HSBC and ING both told clients last week that the US could be gearing up for broader intervention in global currency markets.
The reason? Foreign exchange risks derailing Trump’s efforts to correct US trade imbalances and boost the domestic economy.
‘New world order’
The most striking thing about Trump’s economic policy is his willingness to slap tariffs on major trading partners. China has been his biggest target as the President seeks to rebalance trade between the two superpowers.
However, US tariffs can be undermined by moves in currency markets.
“When President Trump, on 30 May this year, announced he could impose incrementally higher tariffs on Mexico’s exports to the US, beginning with a 5% tariff on 10 June, the MXN weakened close to 5% in the following two days,” HSBC wrote in a note to clients last week.
Market dynamics dictate that the currencies of export-driven economies will tend to devalue against the dollar in response to tariffs. Often the devaluation is big enough to essentially wipe out the impact of the new taxes.
“President Trump’s preferred medicine for addressing the US trade imbalance has created a naturally occurring side-effect of a stronger USD that the administration believes is preventing his medicine from working,” HSBC said.
The solution? Force trading nations to keep their currencies broadly in-line with pre-agreed exchange rates.
“The Administration is calling for foreign-exchange clauses as a backstop in every new trade deal it strikes,” HSBC said. These clauses would ban countries from “competitive devaluations and currency manipulation.”
The US has already inserted a clause to this effect in the renegotiated NAFTA treaty with Canada (CAD=X) and Mexico (MXN=X). The US is currently trying to negotiate new trade deals with Japan (JPY=X), China (CNY=X), and the EU (EURUSD=X), all of which could have similar clauses. A post-Brexit trade deal is also on the horizon (GBPUSD=X).
“Together, these currencies account for 80% of FX turnover according to BIS data,” HSBC said. Adding currency clauses to all of these deals would create a “new world order,” the bank said.
In this “new world order,” currency market volatility would be limited but economic volatility would increase. If countries can’t devalue their currencies to be competitive, then economies would suffer as exports fall or imports become less affordable.
“If currency clauses were to become a common element within future trade deals, it would change the dynamics of the FX market,” HSBC concluded.