President Donald Trump is expected to weaponize currency following tariffs. Recently, Trump’s statement that "Japan and China will hurt the U.S. if they devalue their currencies" further supports this analysis. As a 'strongman' who imposed tariffs on Canada, Mexico, and China as promised, he is also likely to manipulate currency as a pressure tactic.
Despite the U.S. tariff policy causing a drop in government bond yields and strengthening the preference for safe assets, the value of the dollar has plummeted. Just a month ago, it was 152.61 yen per dollar but has recently decreased to 149.31 yen. This indicates that the value of the dollar, which used to be over 150 yen, no longer holds.
In this context, on the 3rd (local time), Trump met with reporters in the Oval Office and said, "Whether it’s the Japanese yen or the Chinese yuan, if they devalue their currencies, the U.S. suffers very unfair disadvantages." He mentioned that there is a very simple solution to other countries’ currency devaluation policies and that the answer is 'tariffs,' but the financial market is also paying attention to the fact that exchange rates were mentioned by Trump.
Earlier, U.S. Treasury Secretary Scott Basset noted in an interview with local media that he is reviewing tariffs, non-tariff barriers, currency manipulation, support for domestic corporations, and lawsuits against U.S. IT giants while evaluating trade partners.
As a result, the market cannot rule out the possibility of a second dollar-related event similar to the Plaza Accord. The Plaza Accord was an agreement reached in 1985 at the Plaza Hotel in New York among the U.S., Japan, Germany, the United Kingdom, and France to adjust exchange rates with the goal of devaluing the dollar.
Japan, which was most affected by the Plaza Accord 40 years ago, has reacted sensitively to Trump's remarks. This is interpreted as a preemptive measure to prevent the U.S. from raising issues about currency manipulation. On the 4th, Katsunobu Kato, Japan's Minister of Finance, stated at a press conference that "Japan does not employ a currency devaluation policy." Chief Cabinet Secretary Yoshimasa Hayashi also expressed the same stance, explaining that "Minister Kato and U.S. Treasury Secretary Scott Basset are continuously discussing the exchange rate closely."
Even if the value of the dollar falls compared to other countries' currencies as intended by Trump, it does not only benefit the U.S. economy. There are significant side effects.
In a phase of dollar weakness, prices of imported products in the U.S. rise, posing a risk of failing to control inflation. For the U.S., which is not free from inflation, a weak dollar could be toxic to the financial market. Additionally, if the rapid decline in the dollar’s value leads to the sell-off of government bonds, it could result in a spike in bond yields.
Park Sang-hyun, a researcher at iM Securities, noted that "the rapid depreciation of the dollar brings more harm than good to the U.S.," but also stated that "as seen in the Japanese government's immediate response to Trump's remarks about the yen, there is room to use the pressure of currency appreciation as another negotiating tool against countries that cannot be pressured solely by tariffs."
He added that "it seems that rather than wanting a weak dollar, Trump has a greater chance of encouraging global funds to re-enter the U.S. through pressure for currency appreciation," noting that "with predictions about (the policy) being difficult, there will be extreme volatility not only in the stock market but also in the foreign exchange market."