Another week, another series of flip-flops by America’s president. Last week, along with reversing course on Nato, Federal Reserve chair Janet Yellen and the US Export-Import Bank, all of which he is much keener on now than he was a week earlier, Donald Trump did not, after all, designate China a currency manipulator.
For someone who railed against Beijing’s unfair exchange rate practices, excoriated his predecessors for failing to confront the issue and swore he would name China as a manipulator on his first day in office, this was quite a climbdown. As it happens, it is a perfectly sensible move. But given that it was coupled with vainglorious comments about the dollar being too strong because of confidence in him, Mr Trump’s about-turn suggests an enduringly eccentric approach to policymaking more than it does a principled and considered change of mind.
Whatever China has done in the past, the idea that it is intervening to gain a competitive advantage is absurd. Terrified of a vicious circle of a sliding currency and uncontrolled capital flight — of the kind that rocked world markets in August 2015 — Beijing has spent billions of dollars in recent years propping the renminbi up, not pushing it down
The US could always argue the Chinese currency should be allowed to float completely free of state intervention. But it is obviously not in America’s interest to see a sharp appreciation against its largest trading partner and risk a destabilisation in the global financial system. In any case, naming China a manipulator, contrary to the over-excited threats of some currency warriors, authorises the US to do nothing except negotiate with Beijing over the renminbi, which it is already doing.
Mr Trump’s other assertion — that the recent unwelcome strength of the dollar was due to the market’s confidence in him — is also somewhat suspect. As part of the “Trump trade”, the US currency rose sharply in the weeks following his election. It has since retraced about half the distance from its peak on a trade-weighted basis. In reality the dollar now appears to be following the prospects of tighter monetary policy in the US relative to other countries. It fell back in March after the Fed’s open market committee signalled a slower pace of interest rate rises.
The exchange rate dropped somewhat this week after Mr Trump’s comments, but he would be badly advised to imagine he can efficiently manage the currency through jawboning. One of the ways the US dollar has maintained its standing as a reserve currency in the past quarter-century is having successive administrations let it find its own level rather than perpetually trying to micromanage it for reasons of international competitiveness.
And while it is welcome Mr Trump is now open to reappointing Ms Yellen as Fed chair, it should not be in the context of interfering with central bank independence. It would be as wrong to press her to keep interest rates low as a matter of principle, which appears to be his current stance, as it was to attack Ms Yellen during the election campaign for not raising them sooner.
It is always pleasing when Mr Trump manages to hit upon a sensible policy and listens to the voices of reason within his administration. Rather more concerning is the caprice with which such changes seem to happen.
On this occasion, the rest of the world can breathe a sigh of relief that a currency war between the US and China has been averted, at least for a while. But it should not imagine that the possibility of destructive confrontation in the field of international economics from Mr Trump’s administration has therefore disappeared.