US interest rates and the yen seemed to stabilize before US President Trump’s Wall Street Journal interview was released. For the first time in months, Trump used the bully pulpit to push the dollar down.

The real broad trade-weighted dollar rose in seven of the last eight months in 2016, including the last four months of the year. It has fallen in the first three months of 2017. US exports are up 6.7% year-over-year in February. Exports trended lower in 2015 but recovered steadily last year and were at two-year highs in February.

Trump said the dollar was getting so strong that hit was hampering the ability of US firms to compete. In an unusual act of contrition, the President said that the confidence the investors have in him was partly responsible for driving the dollar higher. For the record, the read broad trade-weighted measure of the dollar was lower at the end of March than it was at the end of November.

It is not clear what course of action the US will take, if any, to remedy the situation. Treasury Secretary Mnuchin likely was not a happy camper. Speaking for the US, Mnuchin agreed at the recent G20 meeting that countries ought not to seek economic advantage in the currency market. Trump stole much of the thunder of the upcoming Treasury report on the foreign exchange market by acknowledging what we have been arguing for some time: China is not manipulating its currency. 

Some media coverage, without citing sources, said this reduced the threat that China would sell its Treasury holdings. We do not see the basis for the fear in the first place. Being cited a currency manipulator is more cosmetic than substantive, though because China had been so deemed for more than two decades, it would be notable. At the first cut, being accused of manipulation requires bilateral talks, which, as we have noted, China and the US have already agreed to hold. If China sells Treasuries but maintains its reserve level, it is not clear what market is deep enough to absorb those flows, and at what cost to China ( loss of interest income, diversification, and liquidity)