April 14, 2017 5:00 am JST

Trump adds currency policy to diplomatic arsenal

Tokyo left at a loss as yen gains against dollar

TAKESHI KAWANAMI, Nikkei staff writer

U.S. President Donald Trump has voiced concerns about a strong dollar. © Reuters

WASHINGTON -- President Donald Trump's unusual expression of concern about the dollar "getting too strong" suggests that he seeks to use currency policy as a tool to extract concessions and cooperation from such countries as China and Japan.

Since the greenback is key to global trade, any currency-related comments from the American president reverberate throughout the world economy. Heads of government in the U.S., Japan and Europe generally avoid talk about exchange rates, leaving it to their finance ministers.

Trump's comments in an interview with the Wall Street Journal broke this unwritten rule, rattling markets. Using currency policy in diplomatic negotiations would decouple it from macroeconomic policy, creating another source of unpredictability.

Though the U.S. administration's intentions are difficult to read, some -- including Japan's Finance Ministry -- link Trump's remarks to America's relationship with China. In the same interview, he said he would not label China a currency manipulator, a step he had promised during his election campaign. Heightened friction with Beijing would hinder cooperation on dealing with North Korea, the president said.

Currency policy is a potent card for Trump to play as he seeks to alleviate trade imbalances with China and Japan. Though exchange rates are not on the agenda of the Japan-U.S. economic dialogue launching Tuesday, a source in Trump's Republican Party called the issue an ace in the hole.

The administration's domestic initiatives, most notably an effort to replace the health care system known as Obamacare, have largely foundered thus far. The White House has made no progress with Congress on tax changes and infrastructure spending.

By taking a tougher line in foreign policy, including last week's missile strike on Syria, Trump may be trying to regain lost ground. If he enlists currency policy in service of this strategy, the international economic system could be shaken further.

Japan is alert to this possibility. Trump and Prime Minister Shinzo Abe agreed at a February meeting to leave discussion of exchange-rate policy to their finance chiefs. Should Tokyo provoke Washington by openly countering Trump's comments on the dollar, it could face accusations of currency manipulation at next week's dialogue.

The Japanese Finance Ministry fears that it could lose control over currency policy. Senior ministry officials remained silent on the yen's sharp rise Thursday, which followed a jump on Wednesday.

Markets await the U.S. Treasury Department's report on trading partners' foreign-exchange policies, which is due out soon. "If any new information comes out, such as a concrete expression of concern about yen depreciation, the yen could strengthen to the upper 107 range [against the dollar] next week," Yuji Kameoka of Daiwa Securities said. The yen hovered around 109 to the dollar Thursday.

"Exchange rate stability is important," Japanese Chief Cabinet Secretary Yoshihide Suga told reporters Thursday. "We'll be vigilant in watching trends in currency markets."

Seeking to avoid a war of words, Tokyo will continue to have little room to maneuver, which some fear could spur speculative yen-buying.

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