Could US Treasury Intervention Spark A Currency War?

Over the last week or so, chatter regarding potential US currency intervention has begun to surface among some of the top global investment banks and hedge funds. Key names such as Goldman Sachs & Pimco have been openly discussing the possibility of such intervention in recently issued research notes.

Trump’s Verbal Interventions

The discussions have surfaced as a result of Trump’s relentless jawboning over recent months. The President has been consistently lamenting excess USD strength against its rivals, as well as the tactics of the Fed. In particular, Fed Chairman Powell, whom he believes should be cutting the rates instead of leaving policy unchanged.

Trade Weighted Dollar Near Multi-Decade Highs

Indeed, the dollar has recently moved to just shy of multi-decade highs on a trade-weighted basis. This has drawn sharp criticism from Trump. The president has often accused its trading counterparties of currency manipulation in a bid to boost their own exports. With Trump up for re-election soon and his trade policy becoming more aggressive, many are now speculating that we could see the Treasury intervening in currency markets for the first time in years.

Pimco Notes Currency War Risks

The risk of such a move would be that it ignites a fresh currency war. Joachim Fels of Pimco wrote in a note released this week:

“Following a pause since early 2018, the cold currency war that has been waging between the world’s major trading blocs for more than five years has been flaring up again. Moreover, even an escalation to a full-blown currency war with direct intervention by the US and other major governments/central banks to weaken their currencies, while not a near-term probability, can no longer be ruled out,”

Goldman Sachs Says “Anything Is Possible”

In a note released by Goldman Sachs, its analysts concluded that although intervention risks are low, they are rising. They have also highlighted the unpredictable nature of the Trump administration. It says has “created a perception that anything is possible.”

In its note, Goldman says of currency intervention:

“While this would cut against the norms of recent decades, developed market central banks have recently used their balance sheets more actively, and FX intervention is akin to unconventional monetary policy, at least in an operational sense.”

Downside Risks For USD

It is worth noting, however, that while USD is currently elevated, the greenback could soon be in for a period of decline. The market has noted a seismic shift in communication from the Fed over recent months and is now pricing in a .25% rate cut for July. There is also at least one further cut to come before the year is out.

Fed In Focus

Such a move might be enough to fuel a significant enough move lower in the dollar that treasury intervention is warranted unnecessary. For now, the focus lies on the actions of the Fed at its upcoming meeting at the end of the month, as well as the outlook for the rate path over the remainder of the year.

Technical Picture

The USD index has been trading within a shallow bullish channel since 2018 though seems to have lost momentum over the year so far. While price has continued to grind to the upside, moves have been far less convincing with price failing to trade back up to the channel top, instead topping out around 98.30.

Furthermore, momentum studies such as the RSI have been flagging strong bearish divergence over recent pushes higher. This suggests the dollar’s vulnerability to a break lower. For now, the index is pushing against 97.11 resistance in the middle of the channel. To the downside, the key level to watch is the 95.42 zone. The bullish channel low comes in just above this level. A break here should pave the way for a move down to 93.83 next.