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Trade war

Trump steps up attack on Fed and currencies as political stakes rise

President wary of monetary tightening wrecking 'all that we have done'

U.S. President Donald Trump has intensified his rhetoric on trade ahead of critical congressional elections this fall, taking the rare step of criticizing the country's monetary policy.   © AP

WASHINGTON/NEW YORK -- U.S. President Donald Trump has opened up a new line of attack on trade as important congressional elections inch closer, blasting planned interest rate hikes he says will reinforce China's advantage in exports by strengthening the dollar.

The Federal Reserve's turn toward monetary tightening "hurts all that we have done," Trump tweeted on Friday. He told CNBC a day earlier that he was "not happy" about the planned increases.

"China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates" as the dollar strengthens, robbing America of a "big competitive edge," he said in the same series of tweets.

"The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals," Trump argued.

His Republican Party has staked its fortunes in November's midterm congressional elections on a strong economy after signing large tax cuts into law last December. Trump is eager to show his base that he is working toward this end by disrupting a trade system he calls unfair to the U.S. and imposing punitive tariffs on China.

Presidents long avoided criticizing the Fed, treating the monetary authority as an autonomous body. Now, more attacks could be on the way as November's race heats up. But some say Trump's comments risk pushing Fed Chairman Jerome Powell to demonstrate the Fed's political independence by accelerating rate hikes.

Federal Reserve Chairman Jerome Powell   © Reuters

The comments may have been designed to talk the dollar down at a time when some in the U.S. financial sector have accused China of guiding down the yuan in retaliation for American tariffs. Intercontinental Exchange's U.S. Dollar Index sat at its highest level in around a year as of Thursday morning, having risen 7% since mid-April.

The tweetstorm came soon after CNBC aired an interview in which Trump said he is "ready to go to 500" on Chinese tariffs, imposing additional levies on all goods imports from the country, which in 2017 exceeded $505 billion. The U.S. on July 6 imposed a 25% tariff on $34 billion in Chinese imports and plans to apply them to another $16 billion in imports shortly. The administration has also unveiled a list of goods worth $200 billion it plans to subject to a 10% tariff as soon as September.

China is not the only country Trump is targeting on trade. Ahead of a meeting with European Commission President Jean-Claude Juncker next week, Trump told a cabinet meeting Wednesday that if the U.S. and EU "don't negotiate something fair" to reduce European trade barriers, "then we have tremendous retribution." This includes autos -- "cars is the big one," he said.

The U.S. is considering tariffs on all imported autos, ostensibly on national security grounds. But Trump's real goal seems to be obtaining leverage in trade talks, just as when Washington imposed tariffs on steel and aluminum this June. The EU could be exempt from the tariffs if next week's talks go well, as could Canada and Mexico, depending on whether the U.S. gets its way in negotiations on the North American Free Trade Agreement. The Commerce Department will draw up a notice imposing the levies as soon as mid-August.

The American auto industry has supported Trump's efforts to increase U.S. vehicle exports. But while Matt Blunt, president of the American Automotive Policy council, supported talks on a U.S.-EU free trade agreement to reduce export barriers, he warned on Thursday that tariffs would ultimately lead to fewer jobs in the auto industry by driving up prices of vehicles from foreign and domestic automakers.

Countries that would be affected had harsher words for the administration. "The notion that imports of autos or auto parts from your closest allies could threaten U.S. national security is, bluntly speaking, absurd," David O'Sullivan, EU ambassador to the U.S., said at a public hearing on the proposed measures. A Japanese representative noted that imports from that country do not and will not threaten American security.

Group of 20 finance ministers and central bankers plan to take the U.S. to task for its trade measures at their two-day meeting in Argentina beginning on Saturday. The gathering of advanced and emerging nations will include China, the EU and Canada, all of which have been subjected to American tariffs and imposed their own retaliatory measures since finance officials last met in April.

Trade issues are generally outside these officials' purview. But they are now "the greatest cause for concern over the global economy," a Japanese government source said, and "it's only natural that they will be the main topic."

The International Monetary Fund warns that a trade war could knock as much as 0.5% off global gross domestic product, which is projected to grow 3.9% in 2018 and 2019. Emerging economies in Asia could see GDP fall as much as 0.7% in the second year, while those in South and Central America could suffer a 0.6% drop.

Trump's tariffs face growing domestic opposition as well. After Peter Navarro, one of the president's top economic advisers, likened the impact of tariffs already imposed to a "rounding error," Chuck Grassley, the Republican chairman of the powerful Senate Judiciary Committee, called this contention "insensitive AND incorrect."

"Doesn't take into consideration" the "catastrophic" impact on farmers, the Iowa senator tweeted.

"Navarro better learn" how agriculture and trade work, Grassley wrote.

Nikkei staff writer Takeshi Shiraishi in Palo Alto, U.S., contributed to this report.

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