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Highlights from Latest Treasury Department Report on Exchange Rate Policies

In a semiannual report submitted to Congress this week, the U.S. Treasury Department said the Chinese yuan remains undervalued, but did not cite China for manipulating its currency to gain an advantage in trade. The report did not identify any trading partners that unfairly manipulated their currencies, but key observations included:

  • In Japan, domestic demand has not fully recovered since the consumption tax was increased in March 2014, and it contracted further in the second quarter of 2015. Private consumption is still below its end-2013 level. In this environment, strict adherence to deficit-reduction targets could result in prematurely aggressive fiscal consolidation and threaten Japan’s economic recovery and escape from deflation.
  • Through September, the Korean won depreciated by 7.7 percent against the dollar and by 2.0 percent on a real trade-weighted basis. Treasury estimates of foreign exchange intervention using valuation-adjusted reserves indicate that Korea continued to intervene to resist pressure for the won to appreciate against the dollar in the first half of 2015 but then sold foreign exchange in July and August to limit won depreciation, so that intervention over the calendar year to date appears roughly balanced.
  • Many emerging market economies have seen their currencies depreciate in 2015. Weaker currencies make their exports more competitive and can help commodity exporters cope with large falls in the price they receive for their exports, but also add to inflationary pressures and increase the risks from foreign-currency denominated debt.

The full report is available online.