Switzerland Meets Certain Criteria of Currency Manipulator

The U.S. Treasury Department refrained from designating any U.S. trading partner as a manipulator of its exchange rate to gain an unfair trade advantage, while warning that Switzerland met three criteria for designation.

“Treasury will continue its enhanced bilateral engagement with Switzerland, which commenced in early 2021, to discuss the Swiss authorities’ policy options to address the underlying causes of its external imbalances,” the department said Friday in a statement accompanying its semiannual report to Congress on macroeconomic and foreign exchange (FX) policies of major U.S. trading partners.

Taiwan and Vietnam, which had met the three criteria in the December report, no longer were in that category, the Treasury said. Switzerland had dropped off that list in December. Russia wasn’t included in the report as it’s not considered a major U.S. trading partner.

The report was created decades ago out of concern that U.S. trading partners would artificially set their exchange rates to gain a competitive advantage in trade. But the top economic concern is now inflation—which means a cheaper currency could hurt rather than help.

The latest report assesses exchange rates and economic policies in the four quarters through December 2021.

As for China, the Treasury continued to criticize Beijing’s “failure to publish foreign-exchange intervention data.” The department also said the “broader lack of transparency around key features of its exchange-rate mechanism make it an outlier among major economies.”

China used “verbal intervention” as well as the daily reference rate for yuan trading, known as the fix, to “influence the exchange rate,” the Treasury said. A Treasury official told reporters, however, that it was very difficult to gauge how the yuan would have behaved without such measures. It appreciated 2.7 percent against the dollar in 2021.

The department said it “will closely monitor” the FX activities of state-owned Chinese banks—which some observers say are used by Beijing to affect the exchange rate.

What Happens to Currency Manipulators?

A manipulator designation has no specific or immediate consequence, but the law requires the administration to engage with those trading partners to address the perceived exchange-rate imbalance. Penalties, including exclusion from U.S. government contracts, could be applied after a year if the label remains.

A Treasury official acknowledged that Switzerland has some unique factors with regard to its current-account balance, and faces some particular challenges as a relatively small, open economy in the middle of Europe.

The dollar has appreciated notably over the past year as the Federal Reserve moved to tighten monetary policy faster than many of its counterparts, drawing capital to higher-yielding U.S. assets. The Bloomberg Dollar Spot Index has appreciated almost 12 percent over 12 months.

Under President Joe Biden and Treasury Secretary Janet Yellen, the Treasury has taken a less aggressive approach than the previous administration. During President Donald Trump’s term, the Treasury abruptly designated China a manipulator only to lift the label five months later to win concessions in a trade deal. The developments raised concerns that the report was being increasingly politicized.