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No Currency Manipulators Named in Treasury Report; Improvement Seen in China

Friday, October 17, 2014
Sandler, Travis & Rosenberg Trade Report

In its semiannual report on foreign exchange rate policies released Oct. 15, the Treasury Department again determined that none of the United States’ major trading partners is manipulating its exchange rate to gain an unfair trade advantage. Reviewing the policies of ten economies accounting for 71 percent of U.S. foreign trade during the first half of 2014, the report concludes that global growth and job creation continue to disappoint and that much more needs to be done to foster strong, sustainable and balanced growth, which among other things will require further progress toward market determined exchange rates where they do not now exist as well as robust implementation of well-designed structural reforms.

The report’s findings include the following.

- China’s currency has depreciated by 1.4 percent against the dollar so far in 2014 after a 2.9 percent increase in 2013. A variety of factors indicate an exchange rate for the yuan that “remains significantly undervalued,” although the International Monetary Fund set the level of undervaluation at 5-10 percent in July. The report notes that while foreign exchange market intervention has diminished in recent months, China has not yet reached a situation in which its exchange rate can be said to be market-determined. “The key now,” the report states,” is for China to cease foreign exchange intervention within the trading band and allow the [yuan] to adjust.”

- Japan has not intervened in foreign exchange markets in three years and Japanese officials have clearly ruled out purchases of foreign assets as a monetary policy tool. On a real trade-weighted basis, the yen depreciated by 23 percent from October 2012 through August 2014, although many observers have been surprised that this decline has not spurred an increase in Japanese exports.

- The Korean won depreciated by one percent against the dollar from January to mid-October, and in July the IMF assessed that the won remained undervalued by around six percent. Korean authorities should limit foreign exchange intervention to the exceptional circumstance of disorderly market conditions, increase the transparency of foreign exchange interventions, and ensure that macroprudential measures clearly focus on reducing financial sector risks rather than alleviating upward pressure on the exchange rate.

- Taiwan maintains a managed float exchange rate regime and the new Taiwan dollar appreciated 0.2 percent against the U.S. dollar in the first eight months of 2014. The report urges Taiwan to move toward a more fully market-determined exchange rate, limit foreign exchange interventions to the exceptional circumstances of disorderly market conditions, and increase the transparency of reserve holdings and foreign exchange market interventions.

- Brazil maintains a floating exchange rate regime but over the past several years there have been occasional increased official efforts to manage the currency. Earlier this year the IMF assessed Brazil’s real effective exchange rate to be 5-15 percent overvalued.

- Mexico has a flexible exchange rate and employs an inflation-targeting monetary policy regime. As of the end of September (compared to a year earlier) the peso had depreciated by 2.5 percent against the dollar in nominal terms.

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