NS3040 U.S. Treasury’s Report on Foreign Exchange Rate Policies Fall Term, 2017 Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Overview CRS, “Treasury’s Recent Report on Foreign Exchange Rate Policies”, November 3, 2016 Semi annual report Responds to new reporting requirements on exchange rates mandated in the Trade Facilitation and Enforcement Act of 2015 Intended to respond to Congressional interest in: Currency manipulation, or Using exchange rate policies to get an unfair trade advantage Treasury also publishes a monitoring list witch includes major trading partners that meet two of three criteria.

Treasury Report I The report is to focus on the Country’s bilateral trade balance with the U.S. The country’s current account balance And the country’s foreign exchange holdings. An “enhanced” analysis is required for major trading partners that have A significant bilateral trade surplus with the United States A material current account surplus (larger than 3% of that economy’s GDP and Engaged in persistent one-sided interventions in foreign exchange markets Presumption is that these three indicators suggest interventionist polices are being used to undervalue a nations currency

Treasury Report II In October 2016 report found: No economy satisfied all three criteria, and Thus no major U.S. trading partner was manipulating its currency against the U.S. dollar to gain an unfair advantage The treasury has not cited a country for currency manipulation in over two decades

Treasury Report Findings I

Treasury Report Findings II Report cautions that dynamics of the global economy over past year Have limited the appeal of or need for interventions in foreign exchange markets to depress value of currencies Capital outflows from emerging markets have reached historically high levels which puts pressure on emerging market currencies In response number of economies including China have engaged in foreign exchange interventions in opposite direction – trying to prevent currencies from depreciating

Questions for Congress I Report raises questions for Congress What is the international reaction to the Treasury’s new Monitoring List? How have countries put on list responded? What are the implications for the U.S. economy of emerging-market interventions to prop up their currencies? When do interventions promote stability, and When do they create distortions in global economy that can be destabilizing in the medium or long term?

Questions for Congress II Does the lack of transparency on foreign exchange interventions complicate the analysis? Key indicator is intervention by foreign central banks in foreign exchange markets Not all central banks disclose this information How does the Treasure handle situations where it is unclear whether countries are intervening in foreign exchange markets? How should the report analyze countries that are members of a currency union? Germany is on the Monitoring List but can’t intervene