Challenge Posed By Currency Tool

Striking the iron when it is hot, Strong local currency is what you got.

The World Bank lowered growth forecast for Bangladesh to 3.3 % for FY 2026. Moreover, it fears more than 3 million Bangladeshis may go under poverty line next year. Despite sign of reconciliation between the USA and China (President Trump hints lowering the tariffs on China and China exempts few US items from retaliation list) ,prospect of global trade remains uncertain. There is no sign that a consensus will be reached within 90 days though bilateral negotiation is in full swing with many countries. The Federal Reserve plans to lower the policy rate in May. It will weaken the USD. At the same time, it will be high time for the US to employ the currency tool if the ongoing negotiation may not yield expected result. I think the Trump administration will not wait too long to employ the tool. They want to do the unpleasant things at the start of the tenure and reap the benefits at the last leg of the tenure, when the fallout of the reciprocal tariffs will be offset and faded from people's memory.

Given the lack of response from outside world, it is highly likely that Trump administration may resort to currency tool this year. Will the Fed allow the Trump administration to print and $1 trillion and give it to procure rivals' currencies in a bid to appreciate their value against USD?Answer is still unknown ,but further weakening of US dollar will put appreciation pressure on other currencies.

To make clear my point, let us take a look at the formula of Real Effective Exchange Rate(REER):

REER at period t= (Exchange rate index of a country x Inflation rate of the country)x 100÷(Average of trading partners' exchange rate index x weight x Average of inflation rates in partner countries)

Exchange Rate Index at t= (Exchange rate of a county's currency at t)÷(Exchange rate of a county's currency at base period)

The US do trade with most of the countries. Any weakening of US dollar (look at the denominator) means REER of a currency appreciates given its exchange rate remains the same. The USA accounts 20% of our exports whereas the EU accounts more than 45% of our exports. Meanwhile, China and India are our top two importing [sources]. Moreover, except Eurozone, Bangladesh does trade with most of its trading partners in USD. So USD carries [(if not then it should)]more weight in REER calculation and thereby deeply influences REER of Taka. The point is any future depreciation [of USD] will put appreciation pressure on Taka (look at the formula). Since the tariff debate,we have seen Euro, Yuan [,] Dong, Rupee depreciated. This clearly makes possibility of REER appreciation of Taka stronger unless the central bank intervenes in the forex market.

We cannot make great leap towards productivity through technological innovation [in short span of time]. But we can retain the competitiveness through local currency depreciation. For that central bank's active role is what we needed.

Trump administration can also employ International Emergency Economic Powers Act that permits the US president to withhold interest payment on US treasury bonds or to freeze payments to other countries. When this will happen many countries will try to lower their US treasury bond holding, leading to appreciate their currencies. Either approach leads to REER appreciation of local currency.The USA will try its best to make USD less attractive as the reserve currency. So central bank should have a contingency plan on how to convert part of the reserve in gold,Euro or other IMF reserve currencies.