President Trump has voiced concern that a strong Dollar is damaging US competitiveness. Of course, exchange rates do matter for trade, and the US' non-oil trade balance has deteriorated sharply since the Dollar began to climb in 2014. So it’s no surprise that Trump’s laser focus on the US trade deficit would end up targeting Dollar strength—and that currency would become another front in the US-China trade war. Whether the US should, could, and would begin to proactively manage the Dollar, and whether these actions—or further trade war escalation—could lead to a global “currency war” is Top of Mind.  

In this episode, Goldman Sachs Research’s Allison Nathan gets perspectives from the Peterson Institute’s Joseph Gagnon and the Council on Foreign Relations’ Brad Setser; both believe that Dollar strength and the associated US trade deficit are cause for concern, but see low odds of US foreign exchange intervention that triggers a currency war (Goldman Sachs analysts agree). But given that China has been managing the Yuan stronger than it otherwise would be, trade war escalation that motivates a sharp Yuan depreciation could be such a trigger.