(Adds detail on how deficits affect dollar short-term versuslong-term)
By Jason Lange and Ann Saphir
WASHINGTON/SAN FRANCISCO, July 18 (Reuters) - PresidentDonald Trump wants a cheaper dollar, saying earlier this monththe United States should match what he says are efforts by othercountries to weaken their own currencies - giving them an unfairtrade advantage.
The comments have prompted speculation the president couldorder sales of the greenback, which is near a multi-decade highand, according to the International Monetary Fund on Wednesday,at least 6% stronger than warranted by economic fundamentals.
"Conditions seem increasingly favorable for the U.S.administration to intervene against perceived (dollar)overvaluation," Citi economists said in a note Wednesday.
Trump has railed repeatedly against the Federal Reserve forraising interest rates, complaining that the higher rates areholding back U.S. economic growth. But while signs increasinglypoint to the Fed's cutting rates when it meets at the end ofthis month, the lower rates are unlikely to weaken the dollar toa level that Trump wants.
A weaker dollar could help U.S. businesses compete globallyby making exports less expensive, boosting the economy andpotentially helping Trump's bid for re-election in 2020.
But a currency intervention could spark pushback from othercountries, jeopardize the dollar’s status as the world’s reservecurrency and touch off market turmoil. It is also not clear theTrump administration can significantly weaken the dollar withouthelp from the U.S. central bank, which operates independently,or new powers from Congress.
WHAT COULD TRUMP DO?
Trump's talking down the dollar - an unusual step for a U.S.president - has been effective, though less so more recently.
To weaken it further, the U.S. Treasury could sell thegreenback to buy foreign currency, using dollars that it holdson reserve. It has not done that since spending $1.3 billion inSeptember 2000 as part of an international effort to combat acollapse in Europe's currency, the euro.
Most of America's $126 billion in reserves are parked in itsExchange Stabilization Fund (ESF). But if Washington'sunilateral actions spark a currency war, that might not beenough firepower to win. "There are plenty of hedge funds thathave more clout than that," said Paul Ashworth, an economist atCapital Economics.
By comparison, China has $3.1 trillion in reserves. Roughly$5 trillion are traded in the world's currency markets each day.
U.S. Treasury Secretary Steven Mnuchin said in an interviewthat the ESF was meant for minimizing distress in currencymarkets, a possible indication that Washington is not viewing itas a way to engineer a sustained weakening in the dollar.
"We always look at what the fund can be used for indifferent alternatives, but as of now there is no change inpolicy," he said. A Treasury spokeswoman added that thedepartment's overall policy on the U.S. dollar has not changed.
The Treasury uses the Federal Reserve as its agent infinancial markets, and traditionally the two agencies coordinateinterventions. To intervene more heavily, the Treasury couldrequire resources from the Federal Reserve, which mightpotentially create limitless dollars to sell.
The administration could also seek access to more funds fromCongress, said Joseph Gagnon, fellow at the Peterson Institutefor International Economics and a former economist at both theFed and the Treasury. That might entail lifting a legal limit onthe Treasury's borrowing authority, allowing the administrationto raise more cash to buy foreign currencies. "If you get rid ofthe debt ceiling, it's clear the U.S. would win in a currencywar," said Gagnon. https://tmsnrt.rs/2kaagK4
CENTRAL BANK INDEPENDENCE
Getting the Fed on board would pose its own challenges. TheFed sets interest rates to meet mandates assigned by Congress:stable prices, full employment and moderate long-term interestrates.
A weaker dollar could make imports into the United Statesmore expensive and help the Fed by pushing inflation toward thecentral bank's 2% target. But intervening in foreign exchangemarkets to drive it lower would go against a 2013 agreementamong finance ministers and central bankers of the world'sbiggest economies to avoid using exchange rate targets to meettheir economic objectives.
"It is not clear the Fed would be willing to actunilaterally in a way that would antagonize the Bank of Japanand the European Central Bank," said Brad Setser, a fellow atthe Council on Foreign Relations.
Speaking on June 19, Fed Chair Jerome Powell declined to saywhether the central bank would support a currency intervention,saying that exchange rate policy is the Treasury'sresponsibility.
CURRENCY AS A BAROMETER
Even with limitless dollars, it is not clear Washingtoncould control the value of the dollar, which reflects thestrength of the U.S. economy and the attractiveness of itsassets compared with those of other countries.
A key source of the dollar's strength is the relativeweakness of the European economy which has led the EuropeanCentral Bank to keep interest rates low while the Fed has raisedborrowing costs since 2015.
The dollar has strengthened recently due to reduced investorappetite for risky assets amid rising trade tensions and aslowing global economy, according to the IMF assessment. The IMFsaid the euro's valuation was appropriate for the euro zone as awhole but was too low for Germany's fundamentals.
"Interventionist measures to drive down the dollar's valueare likely to be overwhelmed by the configuration ofmacroeconomic fundamentals," said Eswar Prasad, a trade policyexpert at Cornell University. https://tmsnrt.rs/2Sj673q
IT COULD HAPPEN ANYWAY
The dollar may be poised to weaken even without any actualU.S. intervention. Just the possibility is putting downwardpressure on the greenback, said Stan Shipley, strategist at ISIEvercore.
Meanwhile, U.S. economic growth is widely expected to slow,closing the gap with growth in Europe. Widening U.S. budgetdeficits, which delivered a boost to growth and the dollar lastyear, could drag down the U.S. currency longer-term, economistssay.
And the Fed's expected rate cut later this month, along withfurther anticipated reductions over the next year or so, shouldalso have an effect.
"Monetary policy itself looks like it's almost certainlygoing to pull the dollar downward," said Erik Norland, aneconomist at CME Group, whose interest-rate futures market iswidely used as a gauge of market expectations for Fed policy. https://tmsnrt.rs/2k3DWsA
(Reporting by Jason Lange in Washington and Ann Saphir in SanFranciscoAdditional reporting by Saqib Iqbal Ahmed and Richard Leong inNew York and by David Lawder in Chantilly, FranceEditing by Leslie Adler and Tom Brown)