Trump's coming currency war has Asia in its sights
TOKYO – Asia's latest bull market is in wishful thinking as governments around the region believe that they can avoid an epic currency clash with Donald Trump's White House.
Officials in Tokyo, Seoul, Beijing and elsewhere claim to have it on good authority that they can keep their exchange rates separate from US tariff negotiations. It's not clear where this collective delusion comes from, but suffice it to say, a brawl over yen, won and yuan valuations is coming.
The same likely goes for the Indonesian rupiah, Thai baht and Vietnamese dong as Trump's trade negotiation team gets around to shaking down Asia writ large.
One reason Asian governments are in denial that US trade negotiators will try to coerce them into appreciating their currencies is what they're hearing from Scott Bessent. For now, at least, the US Treasury secretary is the face of Team Trump in Asia.
Yet Bessent is merely the 'good cop' to Peter Navarro's 'bad cop.' And it's Navarro who's likely to have the last word on exchange rates, a topic on which he and Trump are more aligned.
Trump, as Asia is learning the hard way, changes his mind on virtually every topic with metronomic regularity. That is, except for his five-decade belief that Asia is stealing American jobs and prosperity — often via weak currencies.
In the 1980s, it was Japan in particular that animated the then-New York real estate mogul. On television and radio talk shows, Trump rarely missed a chance to rail about how Japan had 'sucked the blood' out of American households.
This was around the time of the 1985 'Plaza Accord,' a deal that sent the yen sharply higher versus the dollar. It's something Trump apparently hopes to repeat with China.
Trump once owned the iconic New York Plaza Hotel, where the seeds of Japan's 1990s deflation nightmare were planted. He's now angling to engineer a sharply stronger yuan at his Mar-a-Lago Florida lair.
'Market participants will closely watch for any signs that the Trump administration is indeed seeking a weaker US dollar,' says Carol Kong, a currency strategist at Commonwealth Bank of Australia.
China knows better. Xi Jinping's Communist Party spent years studying how the fallout from that 1985 deal is still undermining Japan's economy. Look no further than the Bank of Japan's inability to push official interest rates above 0.5% three-plus decades after deflation first hit.
Few risks fear Xi's party more than 'Japanification.' As such, any hope Trump, Bessent or Navarro have to drive the yuan sharply higher is almost certainly to be dashed. China's not a Group of Seven member. Any effort to force a revaluation on Beijing could be countered by stronger efforts to anchor the exchange rate.
Though that might not be in China's best interest, Xi's party may decide the end justifies the means if Trump moves on to another target.
Nor does Japan seem remotely open to discussing a stronger yen. Or to be rushed into a bilateral trade pact with Trump. As Prime Minister Shigeru Ishiba told the parliament on Monday: 'We will not follow other countries simply because they are moving forward. Of course, we will keep time limits in mind during negotiations, but we have no intention of compromising our national interests by becoming overly fixated on them.'
Trump won't be happy with Ishiba's position. It's a world away from the obsequiousness Trump 1.0 enjoyed from Ishiba's Liberal Democratic Party mate Shinzo Abe. Back then, Prime Minister Abe complimented Trump profusely, handed him lavish gifts and even nominated him for a Nobel Peace Prize.
Ishiba is cut from very different cloth, something Team Trump is learning the hard way. As Ishiba argues, a bilateral free-trade deal is a complicated, labyrinthine and time-consuming process. In 2019, an impatient Trump agreed to a 'deal' with Tokyo that excluded the auto sector.
The wildcard is what Trump does now. A more rational US president would be inviting Ishiba, the leaders of South Korea and other top Asian economies to the White House to forge a united front against Chinese trade practices that irk Trump. A rational Trump would be pulling Europe into those discussions, too.
But that's not the style of a leader who exited a Trans-Pacific Partnership designed to do just that. The day Trump took the US out of TPP in 2017 was one of the best moments of Xi's dozen-plus-year presidency.
One possibility: Trump grows tired of Ishiba's foot-dragging and starts gunning for the Japanese leader on social media and during near-daily press gaggles in front of roaring airplane engines. This could include Trump's Treasury Department slapping the dreaded 'currency manipulator' label on Tokyo.
Naturally, Japanese officials are anxious to manage the currency issue. Finance Minister Katsunobu Kato plans to find an opportunity to discuss dollar-yen considerations with Bessent at this week's Group of Seven meeting in Canada.
Suspicions are rife that Trump is pressuring Bessent — a hedge fund veteran who presumably knows better than — to will a weaker dollar into existence. Given the downward pressure on the dollar, it's clear traders aren't buying denials from US Treasury officials they don't intend to press the issue with Asian counterparts.
Trump, of course, is angling for a weaker dollar at home, too. One way is to prod the Federal Reserve to slash borrowing costs. He's even threatened to fire Fed Chair Jerome Powell if he doesn't lower rates. Another: cajoling Bessent's team to depreciate the dollar unilaterally, perhaps using currency intervention.
Or, more radically, by defaulting on US debt. On the campaign trail last October, Trump observed: 'I say to the Republicans out there – Congressmen, Senators – if they don't give you massive cuts, you're going to have to do a default.'
Trump went on to say that 'I don't believe they're going to do a default because I think the Democrats will absolutely cave, will absolutely cave because you don't want to have that happen. But it's better than what we're doing right now because we're spending money like drunken sailors.'
For now, Japanese automakers appear to be eating Trump's 25% auto tax. But for how long? In April, Japan's motor vehicle exports fell 5.8% in value.
'Japan's manufacturers are deeply integrated into global supply chains, so trade policy flip-flops risk creating whiplash that would ripple through the economy, hurting growth,' says Stefan Angrick, an analyst at Moody's Analytics. 'In all, Japan's manufacturers are in for a tough time.'
Economist Yutaro Suzuki at Daiwa Securities notes that exports to the US were rising until March. Yet since the tariffs, we're now seeing a 'reversal of the move,' Suzuki says.
Not that the fundamentals are on the dollar's side, as the US national debt careens toward US$37 trillion. 'The structural bear case against the dollar has begun to play out: investors are rethinking under-hedged asset exposures to the US that could lead to a prolonged valuation adjustment lower,' write Bank of America strategists.
This fiscal trajectory prompted Moody's Investors Service to revoke Washington's last AAA credit rating last week. Even if the downgrade doesn't provoke aggressive selling of US Treasuries, it 'highlights the deteriorating fiscal outlook and comes at a time when markets are already attuned to fiscal risks,' says David Mericle, chief US economist at Goldman Sachs.
George Saravelos, global head of FX research at Deutsche Bank, notes that the 'combination of diminished appetite to buy US assets and the rigidity of a US fiscal process that locks in very high deficits is what is making the market very nervous.'
That's why Larry Summers, US Treasury secretary under President Bill Clinton, argues that 'we're being treated by global financial markets like a problematic emerging market.'
In a note to clients, Eurizon SLJ Capital economist Joana Freire warns that about $2.5 trillion of dollars hoarded by Asian exporters and institutional investors 'pose sharp downside risks to the dollar vis-a-vis these Asian currencies.'
The odds of dollar weakness intensifying are increasing even if the US-China trade war eases. 'Easing trade tensions have removed a significant headwind on the dollar over the short-term, but the medium- and long-term impact on the US economy will be felt in the coming weeks and months,' says Win Thin, a strategist at Brown Brothers Harriman.
Strategist Osamu Takashima at Citigroup notes that even if Washington doesn't 'aggressively pursue' a weak dollar, the currency's trajectory is lower based on the state of America's finances.
An auction of 20-year US government bonds on Wednesday (May 21) met with noticeably soft demand. Bad enough that it caught the attention of top lawmakers on Capitol Hill. Texas Representative Chip Roy, one of the Republican Party's leading fiscal hawks, called the 'horrible bond auction' an omen of things to come.
The troubling auction 'certainly reinforced this notion' that 'the balance of power seems to be shifting in favor of higher yields' amid 'runaway' debt issuance and government deficits, says Marios Hadjikyriacos, a senior investment analyst at brokerage XM.
Yet it's doubtful that the dollar's nearly 9% drop versus the yen or 9.5% loss versus the euro this year will satisfy Trump World. The same with the dollar's 6.9% drop versus the Korean won since Jan. 1.
Trump wants markedly bigger drops in the dollar across the board, regardless of the impact stronger currencies would have on Asia's export-geared economies. Asian governments would be wise to put their game faces on when sitting down to the tariff negotiating table.
Follow William Pesek on X at @WilliamPesek
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