PIMCO says the US is winning a 'cold currency war' as it seeks to weaken the dollar
According to a blog post written by PIMCO's chief global economic adviser, Joachim Fels, the decline in the dollar has been fueled by fiscal and monetary policies - but also rhetoric intended to debase the US currency.
"Cold wars are not fought in open battle (for example, with currency intervention), but with words and covert actions. These actions are sending an implicit but very clear signal to markets: A weaker dollar is the goal. Markets have understood the signal", Fels argues.
On the question of how long will this sentiment last, Fels says that "the weak dollar dynamic could stay in place for some time" while arguing that the Trump administration would favour a weaker dollar as long as it doesn't lead to a bond market rout.
With regards to Europe and Japan's recent rebuttal, he says that their abilities to stem the appreciation in their respective currencies will be constrained given the US' willingness to use protectionism as a policy tool.
I think Fels has this spot on, even with the part on how restricted authorities in Europe and Japan have it when trying to defend the rise in their currencies. Central bank intervention is a powerful tool, but can it outweigh the powers that be in Washington? We'll have to wait and see.
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