The Treasury regularly publishes a report that reviews and assesses the policies of major trading partners to determine if they are attempting to influence the exchange rate between the U.S. dollar and another currency, or weaken their currency to obtain an unfair competitive advantage in global trade.
Officials use three criteria to determine if a nation is a currency manipulator: a substantial bilateral trade surplus with the United States, a notable current account surplus, and “persistent, one-sided intervention” in foreign exchange (FX) markets.
Most actions that were taken by foreign governments involved selling U.S. dollars to strengthen their currencies, Treasury Secretary Janet Yellen noted.
Currency global macroeconomic conditions, monetary tightening, dollar appreciation, and rampant inflation have mitigated concerns surrounding current account surpluses, the report states. However, the Treasury will still pay close attention to other nations’ currency practices.
“Differing growth and inflation outlooks have led to a range of policy actions across countries, which, coupled with fundamentals including interest rate differentials, terms of trade shocks, and longer-term growth expectations, have had large impacts on currencies,” Yellen said in a statement.
“Most foreign exchange intervention by U.S. trading partners last year was in the form of selling dollars, actions that served to strengthen their currencies. However, Treasury remains vigilant to countries’ currency practices and policy settings and their consistency with strong sustainable and balanced global growth.”
The Monitoring List
According to the semi-annual report, seven economies were added to the Treasury’s monitoring list of major trading partners whose currency and economic policies require additional observation and closer scrutiny. Officials want to watch for countries’ external balances and determine if their production and domestic consumption are aligned.Critics have long asserted that China should be labeled as a currency manipulator, as it was in 2019.
After then-President Donald Trump imposed tariffs on China, the world’s second-largest economy responded by altering the daily reference rate—an interest rate used to establish other interest rates—and selling dollars. The purpose of China’s manipulation was to sell its goods overseas at a cheaper price.
However, in January 2020, the Trump administration removed China’s designation as a currency manipulator as part of efforts to improve trade relations. The White House claimed at the time that Beijing reassured Washington that it would refrain from competitive devaluation and foster accountability and transparency.
But the latest FX report suggests that the paucity of clarity makes it harder to determine if China is manipulating the yuan, repeating a similar statement in 2021.
“China’s lack of transparency and use of a wide array of tools complicate Treasury’s ability to assess the degree to which official actions are designed to impact the exchange rate,” the report stated.
“Treasury will continue to closely monitor China’s use of exchange rate management, capital flow, and regulatory measures and their potential impact on the exchange rate.”
“Is China misbehaving? Should President Joe Biden’s administration work itself into a lather? The answer is no. There is much less here than meets the eye. Indeed, far less attention is being paid so far to recent renminbi depreciation than in past episodes of downward pressure,” he said.
Back and Forth in Switzerland
In December 2020, the Treasury called Switzerland a currency manipulator for intervening in currency markets to limit the franc’s appreciation.But the Swiss National Bank (SNB) insisted that its interventions were necessary to limit the franc’s value as it would have significantly harmed Switzerland’s economy. The central bank had vowed to continue interfering in the forex market.
The Treasury downgraded Switzerland in 2021, but confirmed that it would maintain its in-depth analysis of Switzerland until it no longer meets all three criteria.
The Swiss franc has gained roughly 2.8 percent year-to-date against its U.S. counterpart.