1 US Treasury FX Intervention | Likelihood: Very Low | Impact: Limited
The most direct way in which the Trump administration could seek to weaken the dollar would be to order the US Treasury (via the New York Fed) to conduct FX interventions. This would involve selling dollars and buying foreign currency most likely via the Exchange Stabilization Fund (ESF) – which permits the Treasury Secretary, with the approval of the President, to “deal in gold, foreign exchange, and other instruments of credit and securities” (see Footnote 1). So in theory, the ESF gives the Trump administration the power to buy and sell foreign currencies – without needing any prior approval from Congress.
Would it be this easy for President Trump to intervene in FX markets? Unilateral FX intervention by US authorities would be politically contentious – not only at home but also abroad. US FX interventions have been sparse since the early 1990s (see Figure 1 below) – with the last two occasions in 1998 and 2000 having been coordinated interventions with major central banks to support relatively weaker foreign currencies in disorderly markets (see Footnote 2). The last time US officials unilaterally intervened to weaken the dollar was in the early 1990s.
The main obstacle to effective US FX intervention via this channel is the size and the mechanics of the ESF. For ESF interventions that involve buying FX assets – which have historically largely been in EUR and JPY – USD assets on the ESF balance sheet need to be sold. As of 31 July 2018, there are just over $22.27 billion dollar-denominated assets held on the ESF balance sheet (all in US government debt). Even if the Treasury Secretary instructed all of these to be used to purchase FX assets, the direct impact on a USD market that has a $4 trillion daily turnover would be fairly muted.
While we will save the technicalities of US FX intervention for a later note, it is worth noting that there are some out-of-the-box ways for the US administration to bypass the ESF technical constraints – as well as any FOMC approval – to increase the pool of funds available to buy FX assets:
- While the Treasury can instruct the Fed to intervene on behalf of the ESF, it is unable to force the central bank to intervene under the Fed’s own account (SOMA). One exception would be if FX intervention was deemed a national emergency. While in the current environment this would seem absurd, it is not something we can completely rule out given that the current US administration is seeking to enforce tariffs on the grounds of national security.
- The other way would be for the administration to officially adopt a policy that seeks to build up US FX reserves buffers. While this makes little sense in the current environment – with the USD a reserve currency and the US running a trade deficit, the White House may see the need for a bigger US FX reserves buffer under its strategic plan to boost the US’s role as an exporting nation. While again this sounds absurd, the Trump administration may be able to ‘sell it’ to Congress by simply pointing to other major trading partners which have bigger reserves buffers – and justifying a similar US policy on the grounds of national security.