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Next up, the currency war

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07.08.2019

Many things bring displeasure to the 45th president of the United States. One of them is a high American dollar.

Donald Trump frequently accuses China of keeping its currency low to compete unfairly with the United States, and is now accusing Europe of doing the same thing.

He has been highly critical of the US Federal Reserve for keeping interest rates - and thus the dollar - higher than he would like, and proposes a simple solution: "We should MATCH," he tweeted in July, "or continue being the dummies who sit back and politely watch as other countries continue to play their games - as they have for many years!"

President Donald Trump, left, meets with Chinese President Xi Jinping at the G-20 summit in Osaka, Japan. Picture: AP

It's not just rhetoric. In May, the commerce department issued a proposal to impose sanctions on countries deemed to be hurting American exporters through currency manipulation. Five days later, the US Treasury lowered its threshold for what constitutes a competitive currency devaluation and expanded its surveillance to include any country that has a trade surplus with the US of $40 billion or more. On Monday this week Treasury labelled China a "currency manipulator" for the first time in 25 years, dramatically escalating tensions. A global currency war is in the making.

Does Trump have a point? Is the US getting a raw deal when it comes to exchange rates? And what would be the implications of a weaker US dollar (let alone an all-out currency war) for Australia, particularly given the Reserve Bank of Australia's decision this week to keep rates steady?

Economists can measure whether an exchange rate is undervalued by calculating what a country's exchange rate ought to be. They do this by looking at the characteristics of its economy, how much it trades with the world, how much it invests overseas and how much other countries invest in it. Much like the cafe worker who owns a Ferrari, if a country's exchange rate is dramatically lower than what these........

© Canberra Times