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Currency Devaluation Amidst Controversial Rate Cuts

While the general public may not be as involved day-to-day, investors and financiers are indeed anxious about the current state of international currency fluctuation and potential currency devaluation. The nation is, in fact, in a state of currency devaluation manipulation.

Many people and news outlets claim that new international tariffs, set to increase long overdue funds on imports and exports, are to blame. The entire geopolitical scene, unfortunately, takes the criticism for potential currency devaluations and the controversial decisions on rate cuts when, in fact, these actions are generally based on financial results.

In the case of China, it is noted that for many years China has weakened the Yuan, which boosts their own exports. A similar situation has taken place in Europe with the Euro. In a recent CNBC interview with President Trump regarding China, he states, “They devalue their currency. They have for years. It’s up to them at a tremendous competitive advantage, and we don’t have that advantage because we have a Fed that doesn’t lower interest rates.” Trump has repeatedly requested the Fed lower the federal fund rate since taking office.

Currency War?

President Trump stands behind his “America First” promise to place the United States in a more advantageous position, even if it sets the country in a possible currency war. With a devaluation
of the dollar along with overdue tariffs, other countries might feel the same pain as the US has over recent years.

A one-quarter percent tariff on Chinese production or a German auto are just a few ways in which President Trump has indicated he could cut the US trade deficit and increase revenue. The problem is, our international partners can weaken their domestic currency, lowering the value of the exported merchandise. When a new US tariff is added, the prices of goods are ultimately the same. In this way, the US experiences currency manipulation by the country in order for them to skirt the tariff.

As an example:

If the US places a 25% tariff on pair of $100 running shoes from China, the price would go up to $125. If the country decides to respond by devaluing their currency at 20% against our dollar, their cost won’t change but the value of the shoes is now only $80. When the US tariff is applied, the new price is about the same as the original price, and the tariff is avoided.

After competing countries take this approach back and forth, the economy suffers and trade wars increase. It has already happened within the last ten years among international trading partners. Historically, in the worst-case scenario, this type of trade conflict could evolve into a military conflict.

Help From The Fed

The Federal Reserve has the power to help in most cases. Because the Fed has the potential to strengthen the dollar or weaken the dollar, they have much control. It was recently reported the Fed posed potentially two rate cuts soon (see When The Fed Cuts Interest Rates, Stuff Happens), in which case worldwide central banks will react— the question is how.

Generally, the Fed will gradually raise federal fund rates incrementally by a quarter of a percent until they normalize, leaving room to lower them in the case of a recession. The recent economic tension has prompted the announcement of the upcoming one-quarter percent rate drop even though we are experiencing a robust market with minimal-to-no inflation. The Fed is not exempt from political controversy as the President makes his best effort to advise based on his experience.

Even a good economy, low unemployment, and record job availability do not stop people from fearing a recession. With help from the Fed in a slight rate slash, the economy has a better chance of
maintaining itself. Of course, then the risk of inflation sets in as the labor markets tighten. We are not out of a trade war either. It’s a time of uncertainty even when we have many certainties.

Alternative Investments In Uncertain Times

There is one secure way in which consumers, financiers, and investors can respond during uncertain economical and geopolitical times. With currency devaluation and rate changes on the forefront, your financial portfolio can change in an instant. Have you thought about an investment in gold or silver— while prices are obtainable? Let Reagan Gold Group share an alternative investment opportunity. Consider a gold IRA or other precious metals option. Gold is going up, while silver is still extremely reasonable. While rising inflation and devaluation of the dollar generally raise the prices of precious metals, you still have time to invest in a product that gives you greater control in uncertain times. It is a great time to look into retirement investments that can help you navigate securely

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