Lawfare comes for the dollar with attack on the Fed - Barry Eichengreen - FT

Sharp interest rate cuts when inflation is already running significantly above its 2 per cent target would fuel inflation, demoralise investors and ignite a rush out of dollar assets. Trump would presumably welcome a modestly weaker dollar, on the grounds that this would boost US exports. But the exchange-rate effect of this justice department initiative, if it succeeds, would be anything but modest. It would be a dollar crash.

It is not a coincidence that every leading international and reserve currency of the past 800 years or so has been the currency of a political democracy or republic, where investors had a voice and where currency issuance was at least partially insulated from the whims of the executive. What has been true of the dollar was true of Britain and sterling in the 19th century, the Dutch Republic and the guilder in the 17th and 18th centuries, Venice and the ducat in the 16th century, and Florence and the florin in the 14th and 15th centuries.

The consequences for the global economy would not be pretty. Fewer foreign reserves would mean less capacity for central banks to intervene in foreign exchange markets, making for greater volatility. More generally, there would be a shortage of international liquidity — of liquid assets that are universally accepted in payment for cross-border commercial and financial transactions. Those transactions would become much more costly to finance. In the worst case, this would spell the end of globalisation as we know it. 

We have seen this scenario once before, where governments compromised the autonomy of their central banks, spawning financial instability and causing global liquidity to implode. We saw it in the 1930s. This is not a period on which most people, in financial markets or elsewhere, look back fondly.

Lawfare comes for the dollar with attack on the Fed