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US currencies may become next global battleground

June 24, 2019 00:00:00

WASHINGTON, June 23 (AFP): US President Donald Trump's renewed focus on what he calls "unfair" exchange rates could presage a new global battlefield that has the potential to do great damage to the world economy.

Trump has spent two years attacking the underpinnings of the global trading system, launching multi-front tariff wars on allies and adversaries alike while complaining that the United States has been taken advantage of.

Under a proposed new rule that could come into effect as early as next month, the US may impose punitive tariffs on any country it determines is manipulating its currency to make its products more competitive than American goods.

Trump has frequently attacked eurozone countries like Germany for benefitting from a relatively weak currency and last week said, "They have been getting away with this for years, along with China and others."

As Trump's attack on European Central Bank President Mario Draghi in the past week shows, once-mundane monetary policy moves could be used as ammunition to justify retaliation.

Economists warn this opens the door to a damaging global currency war pitting everyone against everyone.

If Trump follows this new path, likely with the backing of Commerce Secretary and trade hardliner Wilbur Ross, the United States would be vulnerable to retaliation when the Federal Reserve eventually cuts the benchmark interest rate as Trump has demanded they do.

Central banks use interest rate cuts to spur a sluggish economy, weakening a currency's value in exchange for boosting exports, which then power economic growth.

Mark Sobel, who served in the Treasury for years under Republican and Democratic administrations, said he has "serious reservations" about the new plan.

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