Currencies

U.S. Treasury labels Switzerland, Vietnam as currency manipulators

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Key Points
  • Countries must at least have a $20 billion-plus bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of gross domestic product and a global current account surplus exceeding 2% of GDP to be labeled a manipulator.
  • Vietnam and Switzerland far exceeded these criteria, with foreign exchange interventions of 5% and 14% of GDP respectively.
  • In a long-overdue report, the U.S. Treasury also added India, Thailand and Taiwan to a list of countries it says may be deliberately devaluing their currencies against the dollar.
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Treasury Department names Vietnam and Switzerland currency manipulators, but not China

The Trump administration labeled Switzerland and Vietnam currency manipulators on Wednesday, in another parting shot at trading partners that could complicate matters for U.S. President-elect Joe Biden's incoming team.

In a long-overdue report, the U.S. Treasury also added India, Thailand and Taiwan to a list of countries it says may be deliberately devaluing their currencies against the dollar.

The Covid-19 pandemic has skewed trade flows and widened U.S. deficits with trading partners, an irritant to outgoing President Donald Trump, who won office four years ago partly on a promise to close the U.S. trade gap.

The Swiss National Bank said it does not manipulate its currency and "remains willing to intervene more strongly in the foreign exchange market".

Vietnam's central bank said it would work with U.S. authorities to ensure a "harmonious and fair" trade relationship.

"Vietnam's foreign exchange rate policy has for years been managed in a way to contain inflation, ensure macro stability and not to create unfair trade advantage," the State Bank of Vietnam said in a statement.

The manipulator labels will ramp up pressure on Biden before he takes over, Per Hammered, chief emerging markets strategist at SEB in Stockholm, said.

"You set the agenda and force him (Biden) into positions that he will have to get out of somehow," Hammered said.

A U.S. Treasury official said Biden's transition team had not been briefed, adding: "They are not implicated in this."

U.S. Treasury Secretary nominee Janet Yellen could alter the findings in her first currency report, which is due in April.

A spokesman for Biden's team did not respond to a request for comment.

The President-elect's team has been critical of other moves by U.S. Treasury Secretary Steven Mnuchin, including ending some Federal Reserve pandemic lending programs.

Mnuchin said in a statement that the Treasury "has taken a strong step today to safeguard economic growth and opportunity for American workers and businesses."

China, labeled by Mnuchin as a currency manipulator in August 2019 at the height of trade tensions, was kept on the Treasury's monitoring list due to its high trade surplus with the United States.

Mnuchin lifted the designation in January, two days before the world's two largest economies signed a "Phase 1" trade deal.

Trade advantage

Countries must at least have a $20 billion-plus bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of gross domestic product and a global current account surplus exceeding 2% of GDP to be labeled a manipulator.

Vietnam and Switzerland far exceeded these criteria, with foreign exchange interventions of 5% and 14% of GDP respectively.

The report said that at least part of Vietnam's intervention was aimed at pushing down the dong for a trade advantage, while at least part of Switzerland's action was aimed at pushing down the Swiss franc to prevent effective balance of payments adjustments.

The Treasury said Switzerland's foreign exchange intervention totaled 14% of GDP.

Vietnam, which has seen foreign investment by companies seeking to avoid U.S. tariffs on Chinese goods, saw intervention of more than 5% of its GDP, it added.

Mark Sobel, a former Treasury and International Monetary Fund (IMF) official, said the manipulator designations were "mechanistic" interpretations of the thresholds that ignored subtleties and extenuating circumstances.

These include safe-haven inflows into Switzerland's currency due to the pandemic and a rush of foreign investment into Vietnam in 2019, fueled by U.S. tariffs on Chinese goods.

The IMF has forecast that Vietnam's current account surplus will fall below the 2% of GDP threshold for 2020.

"They're missing some more obvious cases of harmful currency practices," said Sobel, adding that Taiwan and Thailand, which narrowly missed the intervention thresholds, "have been intervening heavily for years."

The Treasury official said the United States will seek negotiations with Switzerland and Vietnam to bring them back below the manipulation thresholds and declined to speculate on whether the process could lead to U.S. tariffs on their goods.

Among remedies specified in U.S. laws governing the currency report are limiting offending countries' access to government procurement contracts and to development finance.

Vietnam could be hit with tariffs under a separate probe by the U.S. Trade Representative's office into the causes of an undervalued dong that could be influenced by the Treasury report. Some business leaders fear Trump could act before a late December hearing on the issue, but a source familiar with the matter said that appeared unlikely.

Taiwan will maintain stability in its foreign exchange rate, a central bank official told Reuters after the island was placed on the on U.S. Treasury's currency monitoring list.

The label briefly lifted the value of the Swiss franc against the dollar. Forex strategists said the move may make it slightly more difficult for the SNB to intervene, but the easing of the coronavirus pandemic would reduce upward pressure on the franc.

The Treasury also said its "monitoring list" of countries that meet some of the criteria has hit 10, with the additions of Taiwan, Thailand and India. Others remaining on the list are China, Japan, Korea, Germany, Italy, Singapore and Malaysia.

The report said that India and Singapore had intervened in the foreign exchange market in an "asymmetric manner" but did not meet other requirements to warrant a manipulator label.