Dollar sees biggest one-day drop in 3 weeks after Trump comments

The U.S. dollar got pummeled on Friday after President Donald Trump accused China and the European Union of currency and interest-rate manipulation that he says has put the U.S. at a disadvantage.

The ICE U.S. Dollar Index DXY, -0.73% traded 0.7% lower to 94.478 after the tweets, marking its worst performance in three weeks.

China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...

— Donald J. Trump (@realDonaldTrump) July 20, 2018

....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?

— Donald J. Trump (@realDonaldTrump) July 20, 2018

That was enough to turn the gauge, which measures the greenback against six major rivals, negative for both the week and the month, according to FactSet. On the week, the index is down 0.3%, while it is down 0.2% in July. The broader WSJ Dollar Index BUXX, -0.71% was down 0.7% at 88.24, as most emerging market currencies rallied as the buck weakened.

It was the second time in less than 24 hours that the president��s comments rattled the buck, after Trump suggested he could slap more tariffs on China and said he wasn��t ��thrilled�� with the Fed raising rates in an interview with CNBC on Thursday.

Don��t miss: Why it matters that the spread between China��s onshore and offshore yuan is widening

In the interview, which aired in full earlier Friday morning, the president said he was prepared to put tariffs on all $505 billion in Chinese goods imported to the U.S., once again stepping up his rhetoric in the continuing trade spat.

Check out: Japan��s yen has become the clearest ��expression of the effect of a trade war��

A first excerpt of the interview was published late Thursday, including Trump��s criticism of the Federal Reserve��s monetary tightening. This led the U.S. dollar to drop into negative territory following a buoyant day, as investors read the comments as an attack on the central bank��s independence. Trump was also concerned the Fed would follow through on the projected two additional interest rate hikes this year, according to a CNBC report.

Read: Trump rips Fed rate hikes, but investors expect Powell to stay the course

In the interview, Trump also touched on currencies, saying China��s yuan was ��dropping like a rock.�� The onshore yuan USDCNY, -0.0251% has fallen 4.2% in 2018. Both the currency and the People��s Bank of China that sets its reference rate have been closely watched by investors, some of which worry that the central bank could devalue its currency as a tactic in trade negotiations. The buck last fetched 6.7689 yuan, down 0.1% from Thursday.

The PBOC weakened the yuan by the most in two years on Friday, setting the dollar-yuan reference rate to 6.7671. The central bank sets the onshore yuan daily a range of 2% in either direction.

��Given the pace of the yuan��s weakness, many participants argued that officials have weaponized it,�� wrote Brown Brothers Harriman currency strategists Marc Chandler and Win Thin in a note. ��We find the claims unpersuasive.��

The more freely traded offshore yuan USDCNH, -0.1958% is down 4.1% in the year, and one dollar last bought 6.7753 yuan, little changed.

The Chinese currency��s weakness was following a year of strength, they argued. ��Second, the PBOC is easing policy while it [is] still trying to force some deleveraging.�� Also, the limited value-added yuan costs incurred in production processes would mean that export prices wouldn��t be ��particularly sensitive to movement��s in the yuan��s exchange rate,�� the strategists said.

Finally, ��the foreign exchange market is better characterized by a strong dollar than a weak yuan,�� the BBH analysts said, adding, ��while typically central banks prefer their currency move in the same direction as monetary policy, currency depreciation is a blunt tool and could complicate other Chinese policy goals, including financial stability.��

Trade remains the dominant topic of the day, with the Group of 20 finance ministers meeting in Buenos Aires for a summit that will be focused on trade and the global economy.

Anneken Tappe

Anneken Tappe is a markets reporter for MarketWatch. She is based in New York.

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