Switzerland is back on the US Treasury Department currency watch list, one step shy of being labeled a currency manipulator. According to the 1988 Omnibus Foreign Trade and Competitiveness Act, the US Treasury Department has to conduct an annualized review to determine which country manipulates its currency to gain a competitive advantage against the US. The biggest drawback of being designated a currency manipulator by the US is the exclusion of US government procurement contracts. Updates are conducted every six months.
Switzerland Back on US Currency Watch List
A 2017 analysis conducted by The Economist showed Swiss currency interference by far exceeded that of China since 2009, but the country was never labeled a currency manipulator. This shows that the list is more symbolic and carries little to no weight at all. Switzerland was removed from the list in October 2018 after being added to it in October 2016. In 2019, the Swiss Franc, the British Pound, and the Canadian Dollar were the only G-10 currencies that outperformed the US Dollar.
The US Treasury report noted that Switzerland should “adjust its macroeconomic policies to more forcefully support domestic economic activity.” It further added that “Despite borrowing costs for the Swiss government being among the lowest in the world, fiscal policy remains underutilized, even within the constraints of Switzerland’s existing fiscal rules.” The Swiss National Bank is known for its market interventions. Forex traders pay close attention to the weekly Swiss Franc Sight Deposit data released, which shows the degree of market manipulation.
China No Longer Designated as a Currency Manipulator
The same report showed the US no longer labels China a currency manipulator. The country was on the list between 1992 and 1994 and under pressure from US President Trump added to its just five months ago. The sole reason was the trade war, in another sign that it is being used for political purposes. Now that the US and China are scheduled to sign their phase one trade deal, China was removed from the list and placed on the same watch list as Switzerland. The PBOC denied it was using the Chinese Yuan as a weapon in the trade war and has not changed its monetary policy in the past five months.
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Who Else Is on the List?
Only three countries were ever labeled a currency manipulator. South Korea in 1988, Taiwan in 1988 and 1992, and China between 1992 and 1994. Countries need to meet two of the three requirements to be designated a currency manipulator. The first criterion is a trade surplus with the US exceeding $20 billion. Thailand just exceeded this limit for the twelve months ending November 2019 and may become the fourth country to be added to the list. Bank of Thailand Governor Veerathai Santiprabhob noted that the country has not verified the breach yet and remains in constant dialogue with the US.
The second criterion is a current account surplus exceeding 2% of GDP. Since the US is running a twin-deficit, it labels other countries manipulators who run a surplus. This lacks merit and provides another example of the uselessness of this list. The third criterion is the only one that makes sense and considers one-sided intervention in the currency equivalent to 2% of GDP in six months out of twelve months. Besides Switzerland, other well-known forex manipulators include Taiwan, South Korea, and Japan.
The US Treasury Department currency watch list includes Switzerland, China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Thailand, Malaysia, and Vietnam. Interestingly enough, all countries are major exporters in competition with the US with the exception of Ireland, which is a prime location for US firms to relocate out of the US for tax purposes. Another way of looking at this watch list is a competition list, where successful countries are added by the US government.
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