Markets need to wake up to the risk of US dollar intervention

President Donald Trump. Photo / AP

Investors are, belatedly, catching up with the real risk that US authorities will try to weaken the dollar.

Early in Donald Trump's presidency, the notion was waved away despite his comments suggesting an aversion to a strong currency. No way, the smart money said. It would be destabilising, probably counterproductive, and a break with long-held norms of the global financial system.

Two-and-a-half years later, long-held norms are for stone-cold losers, as Trump might put it, and the notion that ill thought-out counterproductive things do not happen is for the history books. Trade wars are now conducted by presidential tweet, so why not currency wars? The strong chance that dollar intervention could be announced through a social media account is the icing on the cake.

Market participants are now working to catch up on FX warcraft. Inboxes are filling up with serious analyses explaining how intervention could work.

Already, the history of the past few years is being rewritten, or at least re-examined.

"Following a pause since early 2018, the cold currency war between the world's major trading blocs . . . has been flaring up again," said Pimco's global economic adviser Joachim Fels.

"Round one of the current cold currency war arguably started in 2013 when the Bank of Japan introduced quantitative and qualitative easing," Fels said.

"The European Central Bank joined the cold currency war in 2014 when it introduced negative interest rates, and initiated several rounds of asset purchase programmes including private sector and then also public sector bonds."

As Fels noted, engendering currency weakness was not a specific aim from that round of monetary easing. Still, in hindsight, it is easy to see it that way. It is also easy to imagine that that is how advisers are now presenting it to Trump, painting the US as the "loser".

It is possible that Trump's caustic tweets could do enough to dent the dollar without any official interventions. Maybe this will be a tweetstorm in a teacup. But is that a bet you want to take?

Now is the time to think about how the eurozone could cope with a significantly stronger euro (spoiler: badly) or how the UK could defend itself against charges of currency manipulation if a no-deal Brexit hammered the pound.

On the plus side, unilateral US interventions that gave way to a series of tit-for-tat global interventions would at least wake up what analysts at Deutsche Bank describe as a "bleak" period for currency markets.

Depressing the already glum staff of Deutsche is a tough task at the moment, but the currency markets have managed it with their long, tedious spell of low volatility.

"Periods of famine are often followed by those of feast for trend following strategies," the bank said.

Macro funds and banks' trading desks may end up thanking President Trump for a flurry of interventions. Even if nobody else does.

Written by: Katie Martin

© Financial Times