Currency Tool Employed Again

Peso and yen are rescued by a friend, Currency tool matters in the end.

Yuan has become stronger in three years amid tariff debate[1]. What is interesting is that there is conspicuous absence of Chinese central bank intervention to depreciate Yuan deliberately. It often happened in the past. Undervalued Yuan has always been an issue raised by the USA in bilateral talks. Since president Trump's last visit to China, we have not seen yet any Chinese intervention to devalue the Yuan. Appreciation of Yuan is at the heart of reshaping the global trading system.

Economist Stephen Miran, who is one of Fed's governors, argues in his policy paper titled "A User's Guide To Restructuring The Global Trading System" ( published by Hudson Bay Capital in November 2024) offers some tools to reshape global trading order[2]. One of the tools is tariff. Tariff will help addressing the budget deficit America suffers and make depreciation of Yuan untenable. Miran argues tariff will not drive up the prices if the tariffed /exporting country depreciates its currency to the full magnitude of the tariff. Tariff is not inflationary for America in this case. Usually individuals, other countries buy foreign assets with their foreign currency holdings. US treasury assets are one of them. China has a closed capital market and Chinese govt restricts investment abroad. So holders of foreign currency in China are forced to invest in less productive and risky assets like real estate that accumulated huge bad debt. Miran argues continuing currency devaluation under capital controls will not sustain amid high tariffs. So there will be great capital flight from China. And it will force the Chinese central bank to raise interest rate , leading to appreciation of Chinese currency. The plus side of tariff war is that the US govt will get revenue without incurring the inflation. However, the US may lose revenue if the partner country does not depreciate the currency and an ensuing inflation may be expected.

So far we have seen that the US Supreme Court made the US tariff useless and ordered to refund $100 billion tariff revenue. However, reciprocal tariff is replaced by forced labor tariff under trade act that allowed the US president to do so. Tariff reality still prevails. Yuan depreciated immediately following the months tariff came into affect. But it started to appreciate since then. Meanwhile, US dollar weakened till the US-Iran war broke out.

Another tool Miran advocates is the currency tool. It has two approaches: the multilateral approach and the unilateral approach. In the multilateral approach, the US sits with major trading partners and convince them to appreciate/strengthen their currencies and to depreciate/weaken the USD. This starts to happen when they start to sell USD from their forex reserve. The US starts to buy those dollars and issues new treasury security with duration of 100 years. In addition, the US sells those bonds to friendly countries who need security assistance in troubled waters and territories. By the way, the century bonds will replace the short and medium term bonds,easing the burden of the Fed to make huge interest payments and improving the budget deficits. Here the US projects the global security assistance as public good. And buying the century bond ,you are actually paying for that public good. In addition, holders of the century bond will enjoy favorable tariffs in the US market while the hostile partner will face a different kind of tariff. This multilateral currency approach has a precedent. In 1985, the US,France,UK,Germany and Japan met at the Plaza hotel and agreed to devalue the USD.

The unilateral approach reveals the leverages the US has to reshape the global trading system.It emerges when multilateral approach fails(many countries do not give consent to devalue dollar). One of the leverages is the International Emergency Economic Powers Act 1977 that allows the US president to halt and limit transfers of credit, payments or securities internationally. The US could hold part of the interest payments on treasury security in a bid to make USD unattractive for using it as reserve currency. This will lead countries to lower the size of their USD holdings, creating a depreciation pressure on USD.

Another leverage is the reserve accumulation,which means the US will buy other currencies in a bid to increase the demand of other currencies provided that the Fed prints and supplies the much needed USD.

Like tariff, currency tool has already been employed.In October 2025, we saw the USA announced a currency swap line worth $20 billion to rescue the Argentine peso ,halting depletion of forex reserve of the Argentine central bank. The US treasury secretary urged US banks and investment funds to invest more in Argentina. This is the first time,[reserve accumulation] is employed in tariff debate. This time it is used to rescue an ally Argentina to curb influence of China,which has also given a $18 billion currency swap line with the Argentina. Earlier, Argentina had chosen refurbished F-16 over JF-17 and J-10C offered by China for its Air Force. Here security is being projected as public good and currency is used to aid ally through security umbrella[3].

A week ago US Federal Reserve intervened again to rescue Japanese Yen. Yen witnessed huge depreciation pressure, but Fed's purchase of $8 billion of Japanese Yen helped the Japanese currency to gain some value. Earlier US intervention took place in 2011 after earthquake and tsunami in Japan[4].

Now think there comes a moment when this same reserve accumulation of the currency tool is being used to punish behavior of a rival. In fact, Federal Reserve governor Stephen Miran depicted such scenario in his paper where the US govt requests the Fed to print $1 trillion in a bid to purchase Yuan so that it appreciates .

However, recent appreciation of Yuan does not reflect that reality. It is merely a consequence of internal dynamics that the Chinese regulatory authority allowed to happen.

So far we witnessed that tariff and currency tools of the trade debate [are] applied. In terms of revenue, tariff may fail to bring some change but it shaped several Free Trade Agreements. At the same time, use of currency tool stalled free falling of several currencies and consolidated few security agreements. It is true that tariff debate gave rise to trade related uncertainties and hiked inflation in some parts. And in future,reserve accumulation may be employed by big trading partners for harmful purposes. We have to be cautious of intentional use of major currencies to influence other currencies through currency tool.

References:

[1] "Yuan Hits Strongest Levels In Years As Tensions Grow", The Star,August 06,2026, https://www.thestar.com.my/business/business-news/2026/08/06/yuan-hits-strongest-level-in-years-as-tensions-grow

[2]"Reshaping Global Trading System: What Lies Ahead",https://hoquestake.blogspot.com,April 04,2025,https://hoquestake.blogspot.com/2025/04/reshaping-global-trading-system-what.html?m=1

[3]"Tariff Debate Continues ",https://hoquestake.blogspot.com,November 03,2025,https://hoquestake.blogspot.com/2025/11/tariff-debate-continues.html?m=1

[4]"US Treasury Intervenes To Support Yen After Japan Steps In,FT Reports",Fabiola Arámburo and David Lawder ,August 01,2026. https://www.reuters.com/world/asia-pacific/us-treasury-undertakes-intervention-yen-market-ft-reports-2026-08-01/

Tariff Development Creates Unease

Recent tariff development creates some unease, Chance of buying J-10C does not appear to cease.

Fresh debate on Bangladesh-USA bilateral trade agreement erupts after nitty-gritty of the deal was disclosed by the Bengali press. Former editor of the communist [party] run daily laid bare the details of the agreement on the Bengali daily Prothom Alo(see "Bangladesh Ke Mante Hobe 131 Shorto,Juktorashtro Ke 6(Bangladesh has to comply 131 clauses while the US have to comply 6)", Shawkot Hossein Masum,Daily Prothom Alo,May 4,2026.https://www.prothomalo.com/bangladesh/fumaag6mec). Others followed suit. Since then, there has been a growing cry to nullify the agreement, signed during the tenure of interim govt.

Incumbent Foreign Minister Khalilur Rahman,back then defense advisor, backed the deal by saying that it is the best bilateral deal available when it is compared with other agreements.

Few matters I find interesting to highlight here. The deal allows American insurance company not to generate business any more for Bangladeshi state-run insurance company. Earlier American insurance company was obliged to generate such business for local companies.

The deal questions legitimacy of subsidy in fisheries sector. It also underscores Intellectual Property Right,securing Bangladeshi commitment to stringent measures in case of violation of such rights.

The deal says Bangladesh will abstain from introducing discriminatory policies and taxes targeting digital services originating in the USA. In addition, American tech companies will not disclose source code of their products to Bangladeshi authority in order to do business here. However, this condition can be relaxed for the sake of public procurement or matters related to court.

The deal also says Bangladesh will take stern actions against any foreign country dumping goods into American markets using Bangladeshi soil.

The deal spares existing nuclear commitments but put severe restrictions on future nuclear deal.

The deal obliges Bangladesh to share subsidy related information with the USA.

The deal also forces Bangladesh to implement and ensure trade unions in companies operating in the export processing zones(EPZ). Most of Bangladesh's FDI comes from South East Asian countries. And EPZs offer highest salary and benefits to the workers in Bangladesh. This matter of trade unions in EPZs make the foreign investors unease. Particularly the South Koreans as they have seen the anarchy such unions caused back home. So it may have leverage on future FDI decisions.

The bilateral deal already starts to show its effect. Bangladesh recently signed a deal with Boeing to procure 14 aircrafts in a bid to slash trade surplus it enjoys in American market(see "Bangladesh signs biggest ever plane deal for 14 Boeings", yahoo finance,May 01,2026,https://finance.yahoo.com/economy/policy/articles/bangladesh-signs-biggest-ever-plane-204858697.html ).

Earlier in this space I speculated Bangladesh might buy Boeing-made combat aircraft to cut the trade surplus. The completion of Boeing deal put an end to that prospect. But it brings to fore potential procurement of Chinese combat aircraft.

Though the THINK TWICE Act of 2025 penalises countries buying Chinese arms, Bangladesh may evade the Act as it concluded talks of J-10C purchase before the Act came into effect.

Given the purchasing ability of Bangladesh and geopolitical tensions it faces, Washington may allow exception for Bangladesh as it allowed buying of Russian oil from the vessels in the wake of Iran war.

There has been some unease among the business community,particularly the exporters, with the development of the bilateral agreement with USA. Former World Bank lead economist in Bangladesh Zahid Hussain echoed their concerns in an analytical opinion piece titled "Tariffs spread the pain, refunds kept the gain", published on the Business Standard on May 02,2026 (see "Tariffs spread the pain,refunds kept the gain" ,Zahid Hussain, The Business Standard,May 02,2026,https://www.tbsnews.net/analysis/tariffs-spread-pain-refunds-kept-gain-1427221).

He highlighted that the US authority is paying back billions of dollar worth of tariff to the importers as the US Supreme Court rendered the tariff stance of Trump administration useless. But that money is not shared with Bangladeshi exporters who absorbed part of the tariff and witnessed shrinking of their profit margin. Bangladeshi exporters are also worthy of getting back part of the tariff money,he underscores.

There has been mixed reactions about the bilateral trade agreement. It is too early to tell what kind of impact it will have. But it will influence future trade agreements and FDI for sure. Simmering tensions can be felt for disproportionate distribution of tariff refund. It is speculated that the purchase of Chinese arms by Bangladesh may not be targeted by the THINK TWICE Act.

Trade Deal Favors Depreciation

Trade deal between two leading economies Creates depreciation pressure with less worries.

Both the USA and China successfully concluded a trade deal, clearing the ambiguities amid tariff war. As part of the agreement the USA will impose 55% tariff on Chinese goods while the China will levy 10% tariff on American goods. In addition, China will resume export of rare earth minerals vital for electronics industry and continue sending students to the USA.

Though the deal appears to give a sigh of relief, global trade still remains volatile amid US declared policy on easing the pressure on US dollar demand or weakening the USD.

The deal has implications for Bangladesh as well. Now we exactly know how much the China has to depreciate its currency to stay competitive in the US market. A 55% depreciation of Yuan will make the exchange rate 11.11 Yuan/USD. If the Chinese govt really allows this depreciation, then Chinese products in the US market will not witness increase in prices. So inflation in the USA will not be worse as disseminated by some quarter.

Meanwhile, Bangladesh is still in negotiations with the USA. It is facing a 37% tariff, which is likely to get lowered after successful negotiations. Current budget has proposed to remove VAT on LNG,soybeans and animal feed. It appears that LNG and soybeans may be on the list of Bangladeshi negotiating team. Bangladesh spends billions of dollars importing these two important items. In any eventuality, Bangladesh has to depreciate its currency between Tk 134.20/USD(for 10% depreciation) and Tk 167.52/USD (for 37% depreciation).

Luckily, Bangladesh govt removed tariffs from major agricultural inputs ,leading to lower the food inflation. If fuel prices stay stable, then Bangladesh has a good chance to depreciate its currency further without incurring serious inflationary pressure. The World Bank projection shows growth cut for the global economy, meaning less demand for goods in 2026. This will put downward pressure on major commodities.

The trade deal also put forward a new issue. The USA wants a weakened dollar in the years to come. The China with the resumption of trade will acquire USD and start buying treasury bonds , increasing the demand for USD. The US states passed laws that bar Chinese investment in agricultural land and purchasing property deemed near to sensitive area. Given the dwindling state of Chinese housing and capital market, a large part of the money will end up buying US treasury bonds , further complicating the US steps to weaken USD. It means there will be depreciation pressure on other currencies including Taka unless the USA comes up with a contingency plan.

The recent trade deal between the USA and China will bring pace to other bilateral trade negotiations. Hoping this will lead the trade talks between Bangladesh and the USA to see a successful end. Since there is no appreciation pressure on Taka for now, govt may consider to depreciate Taka further to make Bangladeshi goods more competitive.