Treasury risks label some trading partners as currency manipulators

The Reuters Treasury Secretary Janet Yellen's second foreign exchange report, yet to be released, risks labeling some U.S. trading partners as currency manipulators, although the department didn't apply that label in its last report.

Foreign exchange manipulator designation is based on three criteria: a $20 billion-plus trade surplus with the United States, a current account surplus exceeding 2% of GDP and currency intervention exceeding 2% of gross domestic product.

The Treasury stopped short of branding Taiwan, Switzerland and Vietnam as currency manipulators even though they tripped some of its thresholds under a 2015 U.S. trade law. In December 2020, the Trump administration had labeled Switzerland and Vietnam as currency manipulators.

The Treasury found 11 economies warrant placement on its Monitoring List of major trading partners in April.

There is no automatic punishment for a currency manipulator label, though U.S. law requires Washington to negotiate with designated trading partners.

For the next report, originally due on October 15, analysts said that the following trading partners are at risk but doubt they will get the label.

Switzerland was labeled a currency manipulator by the Trump administration in December 2020 but was spared from being branded as a currency manipulator in Yellen's first report in April.

Switzerland is likely to meet all three criteria, although analysts don't think it will be given the designation.

Switzerland's bilateral goods trade surplus of $39 billion is closer to the Treasury's threshold in the 12 months to June 2021, and it has a current account surplus equivalent to 3% of GDP in the 12 months to the end of the second quarter.

The Swiss National Bank has scaled back its interventions recently, but it spent 25.4 billion francs in the 12 months to June 2021 - equivalent to 3.5% of Swiss economic output and more than the 2% limit set by the Treasury.

Analysts think Switzerland won't be on the list because the Treasury Department TD can look at other factors like currency development, monetary policy and trade policy action.

Taiwan was formally labeled as a currency manipulator by the United States in December 1992. It was put back on the monitoring list in 2020.

Taiwan has breached all three of the criteria, according to analysts at TD, although they don't expect Taiwan to be labeled a currency manipulator.

The trade surplus with the United States hit $29.9 billion in 2020, which is more than $7 billion more than the current account surplus last year, surpassing Washington's criterion, according to official data.

In the first nine months of the year, Taiwan's trade surplus was $17.94 billion, up $5.13 billion on the year-ago period. The current account surplus reached 14.6% of GDP in the first half of the year.

In September of this year, the central bank said it bought a net $8.73 billion to intervene in order to avoid serious problems in the currency market. The central bank bought a net $39.1 billion for 2020. Taiwan's purchases amounted to 7.8% of GDP, according to analysts at TD.

The Taiwan dollar's 5.6% gain compared to the dollar's value last year was among the strongest in Asia. The dollar is up 2.5% against the dollar this year, and is among the best performing Asian currencies.

Taiwan's case is complicated by geopolitical pressures, including heightened military tensions with China, and the island's position as a major exporter of semiconductors that are needed to help with a supply shortage for U.S. manufacturers.

The US is likely to take into account both Taiwan's special economic situation and key role in making chips, as well as its need to show U.S. support for Taiwan in the face of Chinese pressure when it comes to making a decision on whether to label it a manipulator.

Vietnam was labeled a currency manipulator by the Trump administration in December 2020 but was spared from being branded as a currency manipulator in Yellen's report in April.

The United States has a trade surplus of $83.8 billion and Vietnam's foreign exchange intervention, 4.1% of GDP, but not on its current account, according to analysts at TD.

After seven months of ignoring spot dollars, the State Bank of Vietnam SBV stopped buying U.S. dollars in the forward markets and reverted to buying spot dollars after having reached an agreement with the U.S. Treasury to refrain from competitive devaluation and make its exchange rate policies more transparent in July.

The Treasury Department designated China as a currency manipulator on Aug. 5, 2019 but in January 2020 Treasury dropped the designation days before the signing of a preliminary agreement to end the China-U. Trade remains a contentious issue despite a recent bilateral summit between President Joe Biden and Chinese leader Xi Jinping.