Currency row rumbles at Davos as Trump and ECB's Coeuré wade in
Currencies are dominating the debate at the World Economic Forum, after European Central Bank board member Benoît Coeuré called on economies to stop using exchange rates for their own competitive advantage.
Speaking on a panel discussion about ‘the end of easy money’, Coeuré said: “The last thing the world needs today is a currency war. We live in a world of floating exchange rates, we live in a world where exchange rates are not, and should not, be targeted for competitive purposes.”
“We see lots of volatility created recently by different statements and I think that’s just not hopeful. Volatility is not helpful and if that would reach a point where it would create any unwarranted consequence for us, any unwarranted tightening of monetary policy, we would have to reassess.”
Earlier this week, US Treasury Secretary Steven Mnuchin told reporters as he arrived in Davos that “a weaker dollar is good for us”.
The greenback, already trading at three-year lows against the euro, was sent even lower by the remarks, as markets believed they indicated a US administration happy to see the dollar fall – and even want it to fall further.
Sterling, meanwhile, has surged to levels not seen since before the Brexit referendum helped by the dollar's recent deterioration and then on Friday a combination of stronger UK economic growth numbers and more optimistic words from Bank of England governor Mark Carney.
President Trump then waded into the debate, however, contradicting his Treasury Secretary by insisting “the dollar is going to get stronger and stronger and ultimately I want to see a strong dollar”. He said Mnuchin’s comments had been taken out of context and misinterpreted.
ECB Governor Mario Draghi also got involved. Announcing the central bank's first interest rate decision of 2018, Draghi pointedly noted how the language being used by global officials did not meet the terms of reference previously agreed at key IMF meeting in Washington.
Henry Croft, research analyst at Accendo Markets, said: “Trump has already extended a debated that should have been put to bed with a simple dismissal of sentiment. However, in his haste to correct – read, undermine – his Treasury Secretary, the President has in avertedly done much more.
“Talking the dollar up or down has now become the key takeaway from Davos. Expect this theme to continue into the close of the event, and perhaps continue the debate into the days and weeks to come.”
Alan Ruskin, FX strategist at Deutsche Bank, said Trump and Mnuchin appeared to support a weaker dollar in the short term – to help US trade accounts and support growth – but wanted a strong greenback long-term as an indicator of a healthy economy.
“This is a clearly a very confusing message to convey and it’s unlikely to either be reported or understood correctly, which doesn’t really help the message.”