U.S. Treasury Keeps Currency Spotlight on Swiss, Germans

BERLIN (Capital Markets in Africa) – The U.S. Treasury once again singled out Switzerland and Germany for the value of their currencies and exports, suggesting the former could cut interest rates further to alleviate deflationary pressures.

While the department said no major trading partner was manipulating its currency to gain an advantage, it kept the two on the list of countries it considers to have a big trade surplus with the U.S., a high current-account surplus or to be intervening in currency markets. China, South Korea and Japan also got named.

“Though Switzerland’s economic policy situation is distinctive given its small stock of domestic assets, which limits monetary policy options to address deflationary pressures and safe-haven inflows, Switzerland could increase reliance on policy rates in order to limit the need for foreign exchange interventions,” it said.

The Treasury also called for more “transparency” on the SNB’s currency actions. While the central bank doesn’t publish minutes of policy meetings, its annual report includes an intervention tally and weekly data on sight deposits is used to gauge market activity.

Switzerland has only a small government bond market, and therefore hasn’t used an asset purchase program like the European Central Bank’s to spur price pressures. Instead, the Swiss National Bank has used foreign exchange interventions for the better part of a decade to stem appreciation pressure on the franc. Its deposit rate is already at minus 0.75 percent, the lowest of any major central bank.

To be deemed a manipulator, a country must have a trade surplus with the U.S. above $20 billion; a current-account surplus amounting to more than 3 percent of gross domestic product; and repeated currency depreciation by buying foreign assets equivalent to 2 percent of output over the year.

Nadia Batzig, a spokeswomen for the Swiss Finance Ministry, said that recent meetings between Swiss and U.S. officials in Washington didn’t touch on the report and that Switzerland’s U.S. trade surplus had actually narrowed in recent months.

As for the SNB, its foreign currency purchases were designed “to limit the franc’s overvaluation and to prevent more downward pressure on inflation,” she said in an e-mail. “Still the franc remains overvalued.”

The franc is nearly 50 percent stronger against the euro than it was in early 2008, while against the dollar it has climbed almost 20 percent.

SNB President Thomas Jordan has said in the past that the central bank is only trying to limit the strength of the franc and isn’t engaging in competitive devaluation.

After President Donald Trump lambasted Germany for its “massive” trade surplus earlier this year, the government in Berlin argued it was merely a reflection of global demand. Finance Minister Wolfgang Schaeuble has also pinned some of the blame on the ECB’s loose monetary policy designed to address feeble inflation.

At $270 billion, Germany had the world’s largest current account surplus, and policies raising its real effective exchange rate would be key, the Treasury said.

“Germany should take policy steps — including meaningful fiscal reforms to minimize burdens from elevated labor and value-added taxes — to encourage stronger domestic demand growth, which would place upward pressure on the euro’s nominal and real effective exchange rates and help reduce its large external imbalances.”

Germany’s Finance Ministry declined to comment.

Source: Bloomberg Business News