Currency War? Trump Lambasts ECB Draghi
The buck and the euro are seeing much action this week, with the POTUS lambasting ECB chief Mario Draghi via Twitter.
Last Tuesday, European Central Bank Chief Draghi indicated in a speech that he was open to boost monetary stimulus. That is if the inflation target remains elusive and European economic conditions don’t pick up.
For the bank, such monetary stimulus could mean the comeback of a quantitative easing program. This method requires the bank to print new money to purchase assets like government bonds. An alternative is interest rate cuts.
In comes the US president, taking Twitter his adverse reaction to ECB’s plans.
Trump says that the stimulus makes it “unfairly easier for them to compete against the USA.”
“They have been getting away with this for years, along with China and others,” said Trump on Twitter.
At first, the euro lost 0.2% of its gain and traded 0.3% lower at $1.118 after Draghi’s comments. It perked up a bit after Trump’s remarks but eventually gave up the benefits.
This marks the second time the POTUS blasted the European bank of deliberately weakening the euro to gain a trade advantage.
ECB vs. Trump
Experts have got their say. According to one, Trump’s comments could be dangerous.
If an economy suffers from low inflation for an extended period of time, a weak currency is desirable. But if two economies are trying to weaken their currencies, then “the prerequisite conditions for a currency war are set.”
In a currency war, countries try to gain trade advantages by lowering the value of their currencies.
Meanwhile, Draghi said that the ECB focuses on keeping inflation just below 2%. He also emphasized that they don’t target exchange rates.
Draghi’s comments stand in stark contrast against his previous remarks. Two weeks ago, he said that the bank would hold rates until at least mid-2020.
Now he’s adopted a more dovish tone, while signs of weakness in leading European economies bug the bank.
The bank predicts that growth in eurozone countries will be at 1.2% this year. Last year, it was at 1.8%.
The slowdown manifests the looming worries over the Brexit, as well as the global tensions.
Trump Against the Banks
Concerns sent jitters through the market, with Trump appearing poised to wager a currency war against its major trading partners. This includes the ECB.
Trump has previously accused China of intentionally weakening its currency to better compete with the greenback.
He has also made similar accusations toward the US Federal Reserve, claiming that the Fed was putting the US at a disadvantage compared to China, Europe, and others.
He has urged the US central bank to try and strengthen the American economy. Such efforts could include cutting rats and going back to the crisis-mode stimulus programs.
However, Trump has only gotten more frustrated as the Fed appears disobedient of his demands. Last Tuesday, he indicated he would consider demoting Fed chairman Jerome Powell.
Overall, Trump showcases an unprecedented move in the history of US presidents: influencing central banks—of the US and others.
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