The US will likely win in a ‘cold currency war,’ says Pimco

  • A “cold currency war” refers to a conflict not fought with outright Central Bank intervention in the foreign exchange markets, but with interest rate cuts, negative interest rates, quantitative easing and yield curve control, according to Joachim Fels, global economic advisor at Pimco.
  • The market is already pricing in a 25 basis point rate cut by the Federal Reserve, but there’s a 50% chance the U.S. central bank may lower rates by 50 basis point in July while keeping open its options for another rate reduction in 2019, said Fels.

The U.S. will likely emerge the winner in a “cold currency war” that’s heating up, according to Joachim Fels, global economic advisor at Pimco.

“If there is a winner in this ‘cold currency war,’ it’s going to be the U.S. in the sense that the dollar is more likely to weaken than strengthen from here,” said Fels told CNBC’s “Squawk Box ” on Monday.

He said a cold war on the currency front refers to a conflict not fought with outright central bank intervention in the foreign exchange markets, but with interest rate cuts, negative interest rates (like those in Europe and Japan), quantitative easing and yield curve control.

In the case of the U.S., “presidential tweets” also factor into the mix, Fels added.

He noted that in early 2017, shortly after his election, U.S. President Donald Trump spoke to Treasury Secretary Steven Mnuchin about the need for a softer dollar. Subsequently, the greenback ended up weaker for the entire year.

“The same could happen again, especially as the Fed obviously has more room to cut interest rates than the (European Central Bank) or the Bank of Japan, ” said Fels.

“The U.S. administration probably has the upper hand in this currency war,” he added…

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