The dollar slumped broadly on Thursday, falling to a five-month low against the yen, after U.S. President Donald Trump helped accelerate its recent decline by saying the currency was too strong.
The greenback took a heavy hit after Trump told the Wall Street Journal that the dollar “is getting too strong” and that he would prefer the Federal Reserve to keep interest rates low.
The U.S. currency hit a five-month low of ¥108.73 in Asian trading but later steadied around ¥109.
The comments were a fresh reminder of the president’s protectionist trade rhetoric, which has been a source of concern for dollar bulls.
“Trump’s comments came at a time when some had begun to think that perhaps the president was not as supportive of a weak dollar as initially perceived,” said Shin Kadota, senior strategist at Barclays in Tokyo.
“But he reiterated his view that a strong currency hurts U.S. competitiveness, adding fresh downward pressure on the dollar.”
Trump’s comments broke with a long-standing practice of both U.S. Democratic and Republican administrations of refraining from commenting on policy set by the independent Federal Reserve. It is also unusual for a president to talk about the value of the dollar, a subject usually left to the U.S. Treasury secretary.
The dollar has shed 2 percent against the yen so far this week, with the safe-haven Japanese currency already on a bullish footing because of a rise in geopolitical tensions.
There are fresh concerns about the French presidential election and possible U.S. military action against Syria and North Korea. With investors viewing South Korea’s sovereign notes as a riskier bet on the rising tensions, the premium for the country’s credit default swap debt insurance has risen to a nine-month high.
That Trump seemed unmoved by the significant weakening of the dollar against the yen already in place increased nervousness toward the U.S. Treasury’s semiannual currency report due Friday, and next week’s U.S.-Japan bilateral dialogue.
“It appears that the Trump administration is trying to make up for its internal policy shortcomings with a show of force in external policy, leading to a confrontational stance with trade partners,” said Daisuke Karakama, market economist at Mizuho Bank.
“Currency rates and trade balance inevitably become themes to confront other countries with. So if you are in the forex market it requires a lot of courage to buy the dollar right now.”
In the interview with the Wall Street Journal, Trump also backed down on a long-held vow to label China a currency manipulator.
“While we can count on the fingers of one hand the number of times Presidents Obama or Bush talked about the U.S. dollar’s value, President Trump is of course happy to be different,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “It is clear that he does not regard talking about the currency as manipulation, rather just plain speaking.”
While history shows the impact of talking down a currency is usually short-lived, Trump deciding to comment directly on the greenback could ultimately hurt his own credibility, given he repeatedly accused nations such as China and Germany of weakening their currencies to fuel an unfair trade advantage over the U.S.
“Of course, he’s risking his credibility, but Trump doesn’t seem to care,” said Axel Merk, president of Merk Investments LLC in San Francisco. “The cheapest policy is one where you can move the currency around by word of mouth. So he might be encouraged.”
China, the country that drew most of Trump’s ire when it comes to alleged manipulation, appeared to be a beneficiary of his jawboning. While the yuan rose 0.2 percent versus the dollar as of 1:30 p.m. in Shanghai, it weakened against other major peers, falling 0.2 percent versus a replica of the 24-currency basket Chinese policymakers use to track the yuan, the most since March 21.
“Trump is now returning a little gift to China after Xi’s visit last week,” said Nathan Chow, an economist in Hong Kong at DBS Bank. “This is an easy gift, anyway, as China doesn’t meet all the Treasury’s requirements as a manipulator.”
The U.S. is expected this month to release its first report under Trump on foreign currency practices. This is the formal channel to impose a manipulator designation and can lead to negotiations and penalties. The department is required by law to report to Congress twice a year on whether America’s major trading partners are gaming their currencies.
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