Economist Warns Trump Administration's Currency Interventions Are a 'Desperate Attempt' to Evade Market Signals
Key Takeaways
- •Eswar Prasad described the Trump administration's consideration of buying Japanese yen as a desperate effort to evade financial market warnings about unsustainable government debt.
- •Direct U.S. currency-market interventions have been uncommon in recent decades, with the coordinated G7 response after the 2011 Fukushima disaster being a rare example.
- •A weak yen increases Japan's import costs and debt servicing burdens while also undermining the effectiveness of Trump's tariffs by making trading partners' exports cheaper.
- •The Trump administration has previously supported currencies of allied nations such as the Argentine peso and has discussed similar action regarding the United Arab Emirates, despite those countries not facing emergency conditions.
- •Prasad cautioned that without fiscal discipline, these currency interventions will likely worsen the U.S. government's debt situation rather than resolve it.
Economist Eswar Prasad has raised concerns about what he describes as the Trump administration's "desperate attempt" to circumvent warnings from financial markets, following reports that the U.S. Treasury is considering purchasing billions of dollars' worth of Japanese yen and intervening in currency policy.
In a Thursday opinion column published by The New York Times, Prasad explained the rationale behind President Donald Trump and the U.S. Treasury's interest in Japanese yen intervention, tying it to a broader pattern of U.S. currency policy. Prasad, a professor of trade policy and economics at Cornell University and a senior fellow at the Brookings Institution, is a prominent voice on global currency and financial-system issues.
"They are tied together by one big problem: unsustainably high levels of government debt," Prasad wrote. "Currency market intervention is a desperate attempt by Tokyo and Washington to evade the blaring warnings from financial markets."
Prasad noted that U.S. intervention in another country's currency policy is uncommon and typically occurs only during crises. Direct U.S. currency-market interventions have been rare in recent decades, with coordinated G7 action following the 2011 Fukushima disaster among the few modern examples. The Trump administration, however, has been propping up allied countries' currencies to advance its agenda and reward partners.
"It seems risky and expensive to buy another country's currency or even offer to temporarily swap dollars for that currency, especially one whose value is falling," Prasad wrote. "The administration has U.S. economic interests in mind but is also keen to propagate its policies and reward its allies."
Prasad cited the Trump administration's decision to support the Argentine peso in October, as well as discussions about similar intervention in the United Arab Emirates. "None of those countries had reached the level of emergency usually required," he wrote. "None of these actions were born of benevolence."
Regarding the yen, Prasad explained that the Trump Treasury is interested in purchasing the currency to halt its decline. A weak yen drives up import costs and increases debt servicing burdens for Japan, while also undercutting the effect of Trump's tariffs—when a trading partner's currency depreciates, its exports become cheaper, partially offsetting the added cost of tariffs.
However, Prasad cautioned that the U.S. cannot outrun its own debt burden. "With no sign of any discipline on fiscal matters, it will probably result in Washington digging itself into an even deeper debt hole," he wrote.
