US: No country is the legislative currency manipulator - BBH

Late Friday the US Treasury issued its biannual report on foreign exchange and international economic policy and no country met the legislative definition of currency manipulation, notes the analysis team at BBH.  

Key Quotes

“The Treasury provides a watch-list.  In addition to China, Germany, Japan, Korea, and Switzerland, the US added India to this list.”

Its concerns about India seemed a bit reluctant and largely on strict definitional grounds.  India has intervened in the first part of 2017, but not so much in Q4.  Still, intervention passed the two percent threshold.  India also enjoys a bilateral trade surplus with the US of $23 bln, just above the threshold.  The Treasury Department acknowledges that the rupee is not undervalued according to the IMF and that India runs an overall current account deficit of 1.5% of GDP.”

There was little acknowledgment in the report that the large fiscal stimulus that is being provided will likely to widen the US external deficit, all else being equal, as it is fond of saying.  There is a slight hint of why.  Consider that the US recorded a current account deficit of $466 bln in 2017.  Yet, the Treasury's report indicates that the US net international investment position improved by $470 bln.  Despite the US living 2.4% beyond its means (investment in excess of savings, which is the current account deficit as a percent of GDP), its net indebtedness to the world fell.”

The US Treasury reckons that US investors own $27.6 trln of foreign assets.  Foreign investors own $35.5 trln of US assets.  The net result is that the US owes the world $7.8 trln.  The key to the changing net position is not new flows.  The accumulation of past flows swamps the new funds being deployed.  Instead, valuation swings, including foreign exchange and stock and bond prices are the drivers.”

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