This bill (to be introduced this month) will “mandate the US Treasury to intervene in global markets if currencies become fundamentally “misaligned.” More specifically, the coalition reportedly believes that the administration’s opposition to currency market intervention has not only failed to sway Chinese government thinking but has also “inhibited co-ordinated policy action through the Group of Seven industrialised nations over other weak currencies such as the JPY.”
It’s fairly obvious that the mention of the JPY is potentially significant as it suggests that Congressional leaders were swayed by the arguments of US manufacturers during the recent hearings over Chinese and Japanese currency policy, since they are writing a bill to address the issue.
The Treasury is releasing its semi-annual report on overseas currency practices on Wednesday-that will surely be very closely observed.
Overall, this paints a picture that shows things are brewing. When exactly the pot will come to a boil is another story.
All of this puts the Federal Reserve in a bit of a quandry. Current account imbalances are all about the dollar (along with other industrialized currencies) being too strong vs the Asian currencies. Raising interest rates (should that become necessary) would no doubt force the dollar even higher, which is the exact opposite of what the proposed legislation would be trying to achieve.
