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President Obama talks trade

Pacific trade and the fear of currency manipulation

Adam Allington Apr 23, 2015
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President Obama talks trade

Pacific trade and the fear of currency manipulation

Adam Allington Apr 23, 2015
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A free-trade deal among the United States and 11 Pacific nations called the Trans Pacific Partnership (TPP) is wending its way through Capitol Hill. Opposition to the deal has been largely united under the threat of currency manipulation.

Generally speaking, a country with a weaker currency is thought to have an advantage in trade, because their stuff is cheaper. So, currency manipulation is when a central bank buys or sells a lot foreign currency in an attempt to influence the exchange rate. 

In practice, however, Carl Weinberg , with the firm High Frequency Economics, says the threat posed by this kind of tinker tends to be overstated.

“Quite frankly, domestic monetary policy usually has more important things to do to help the economy than focusing on trade,” Weinberg says.

While some countries such as Japan and South Korea may dabble in this area, Weinberg says the broader impacts of the Pacific trade deal outweigh the risk.

“The trade treaty has values and merits of its own, independent of anything that is happening on the currency side, at any exchange rate,” he says.

The Treasury Department already has the ability to take action during cases of currency manipulation, which currency analyst Marc Chandler of Brown, Brothers Harriman says is an authority it rarely uses, even if some members of Congress think it should.

“The U.S. Treasury has not cited another country of currency-market manipulation in over a decade,” Chandler says.

Free-trade agreements tend to be controversial, especially leading up to election years, and Chandler points out that if the Pacific deal does go through, together with NAFTA, roughly 40 percent of world GDP would be subject to free trade agreements.

And if it doesn’t? 

“It would look like the U.S. is retreating from the global international leadership space.”

China, the country that is most often accused of manipulation isn’t part of this deal, and the yuan has been gradually gaining against the euro and the dollar for some time.

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