The Federal Register today includes one of the most controversial steps the Trump Administration is taking in its already contentious trade wars: use of countervailing duties to punish nations the Commerce Department determines are manipulating their currency to advantage export competitiveness.  Historically, U.S. judgments about currency manipulation have been the sole province of the Treasury Department which, regardless of administration, has long been chary of issuing manipulation findings.  Even if Treasury stays its hand, the Commerce Department believes it has authority independent of Treasury and is likely to be far less cautious about asset-pricing, monetary-policy, and global financial-market impact, making this notice of considerable importance to international financial institutions.  In this report, we assess Commerce’s proposal and its impact on financial markets and institutions.  Implications include first-order ones due to higher-duties on nations outside the scope of current trade disputes, but also second-order U.S. investment, financial-market, and financial-system disruptions if central banks alter exchange rates to avoid countervailing duties.

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