By Sinead Carew and Jamie McGeever
NEW YORK/LONDON (Reuters) - U.S. President Donald Trump and a top economics adviser on Tuesday unleashed a barrage of criticism against Germany, Japan and China, saying the three key U.S. trading partners were engaged in devaluing their currencies to the harm of American companies and consumers.
The comments from Trump at the end of a White House meeting with pharmaceutical executives, as well as from trade adviser Peter Navarro in a newspaper interview, were the starkest indication yet that the first-term Republican president is prepared to jettison two decades of "strong dollar" policies advocated by predecessors dating back to the Clinton administration.
The criticism also signals a weakening of the U.S. commitment to an agreement among the financial leaders of the world's top 20 economies, struck after the 2008 financial crisis, that countries would not pursue policies to target exchange rates for competitive purposes.
"Those comments, talking about somebody else's currency, talking about valuation, almost seem like they're criticizing the construction of the euro zone which is a whole other issue," said Greg Anderson, Global head of FX strategy for BMO Capital Markets in New York. "I'm sure a lot of people have those thoughts. In the gentleman's agreement, as an official you don't mention those thoughts."
Trump and Navarro's remarks are just the latest to deepen a growing unease in financial markets about the outlook for global trade in the Trump era and sent the U.S. dollar into a tailspin against the euro and yen on Tuesday.
A broad measure of the dollar against the currencies of key trading partners sank by 0.85 percent to cap a 2.6 percent decline in January, its weakest monthly showing since last March.
The market convulsions began when Navarro, who heads Trump's newly created National Trade Council, told the Financial Times newspaper that the euro was like an "implicit Deutsche Mark" whose low valuation gave Germany an edge over the United States and its European Union partners.
That propelled the euro up about 0.5 percent against the U.S. dollar and drew a rebuff from German Chancellor Angela Merkel, who said the country respects the independence of the European Central Bank. Some blame the ECB for engineering an ultra-loose monetary policy in order to keep the trading bloc's common currency weak and stimulate economic growth in the euro-zone.
"Germany is a country that has always called for the European Central Bank to pursue an independent policy, just as the Bundesbank did before the euro existed," Merkel told a news conference in Stockholm with Swedish Prime Minister StefanLofven.
Hours later, Trump added his own critique of Japan and China to the mix, veering from discussing drug prices to currency valuations as he wrapped up a meeting with the heads of six top pharmaceuticals companies whom he is pressuring to lower prices.
Bemoaning the fact that so many drug makers had relocated outside the United States, Trump blamed U.S. regulations and contended other countries "take advantage of us with their money and their money supply and devaluation."
"Every other country lives on devaluation," he said. "You look at what China's doing, you look at what Japan has done over the years. They -- they play the money market, they play the devaluation market and we sit there like a bunch of dummies."
Japan's yen gained more than 1.0 percent against the dollar following Trump's off-the-cuff comments.
With on-shore Chinese markets closed for a week for the lunar New Year holiday in Asia, reaction in its currency was limited to the off-shore market. The off-shore yuan surged by around 0.3 percent on Tuesday. Capital outflows have seen the yuan decline steadily in the past couple of years taking it back to levels last seen during the 2008 financial crisis.
Trump's and Navarro's bluster against trading partners' currencies added to uncertainty in markets about the future of a U.S. "strong dollar" policy.
"We sense the strong dollar policy is over, a thing of the past," said Neil Jones, head of hedge fund FX sales at Mizuho inLondon. "Recent U.S. concern over the strong dollar versus China is now feeding into the euro zone with these comments on an undervalued euro."
Investors have long looked to the U.S. Treasury Secretary as the main voice for guiding markets on dollar policy, and since Robert Rubin in the Clinton administration they have repeated the mantra that a strong dollar is in the interests of the United States.
Trump's own nominee to head the U.S. Treasury, Steven Mnuchin, tried to maintain that tricky balance at his confirmation hearing before the Senate Finance Committee earlier this month. He said Trump's earlier remarks on dollar strength referred to a short-term spikes due to market factors, not its longer-term value.
"The long-term strength over long periods of time is important" for the dollar, Mnuchin said.
Now, however, markets have new voices to track on the matter: Trump and Navarro, a trade protectionist and China hawk whose role is still unclear to many investors.
"It’s all new stuff," said BMO's Anderson. "This hasn't been done before. Its maybe a little unsettling for the market."
(Reporting by Jamie McGeever; Writing by Dan Burns; editing by Clive McKeef)