The IMF warns against rate cuts and the intervention of the currency to improve the trade balance

WASHINGTON (Reuters) – The International Monetary Fund on Wednesday warned that governments are trying to weaken their currencies with monetary easing or market intervention, saying in a blog that this would hurt the way they work. the international monetary system and the deterioration of the situation of all nations.

This message, released at a time when global central banks are meeting this week to discuss monetary policy issues in Jackson Hole, Wyoming, said the policy proposals to use monetary easing and direct purchases currencies from other countries are unlikely to yield results.

"It should not be overemphasized that a relaxation of monetary policy can sufficiently weaken a country's currency to allow for a lasting improvement in its trade balance through changes in spending. It is unlikely that monetary policy alone will induce the large and persistent devaluations needed to achieve this result, "IMF chief economist Gita Gopinath and IMF researchers Gustavo Adler and Luis said in an article. Cubeddu.

The US President, Donald Trump, has multiplied his complaints about the strength of the dollar that has weighed on US exports in recent days. Indeed, a key index of the value of the dollar against other currencies has risen against a backdrop of .DXY. On Wednesday, he relaunched his Twitter campaign for the Federal Reserve to cut US interest rates.

"We are competing with many countries with much lower interest rates, and we should be below them. Yesterday, 'the highest dollar in US history. & # 39; No inflation. Wake up to the Federal Reserve, "tweeted Trump.

IMF researchers said that one of the problems posed by the impact of fluctuations in the US currency on the trade balance was that many US imports from China and other countries were billed in dollars and cents. not in local currencies.

The IMF's blog pointed out that global external imbalances are not clearly misaligned and reiterated the fund's view that China's external position, which includes the value of the yuan, was broadly in line with fundamentals in 2018.

"External imbalances have fallen significantly from the peaks recorded during the global financial crisis. The dollar was only moderately overvalued in 2018. This contrasts sharply with the mid-1980s when, under the Plaza agreement, the major central banks had acted together. a strong overvaluation of the dollar, "they wrote.

The US Treasury said China was a money handler and asked the IMF to work with China to "correct" the situation.

Given the depth of the dollar and the euro market, stocks such as buying foreign currency to weaken the dollar or taxing capital inflows are "likely to be ineffective" .

"What's more, they have negative implications for the smooth functioning of the international monetary system."

Even countervailing bilateral tariffs to offset an undervalued currency will probably not reduce overall trade imbalances, as they would mainly divert trade to other countries, IMF researchers said.

"Instead, they are likely to hurt national and global growth by undermining business confidence and investment and disrupting global supply chains, while increasing costs for producers."