Treasury Secretary Janet Yellen faces one more headache on an agenda packed with everything from COVID-19 relief to addressing inequality and overhauling tax policy: tensions over foreign-exchange intervention.

The dollar has tumbled 13.1 per cent from its high last March, thanks in part to historic moves by the Federal Reserve to pump liquidity into the financial system and pull down American borrowing costs. While policy makers abroad at first benefited from U.S. action to stave off a global credit crunch, the appreciation of their currencies more recently threatens to curtail their own recoveries. So from Europe to Thailand to Chile, officials have laid out plans for sustained intervention.

For Yellen, who this month set herself apart from previous Democratic administrations by rejecting a return to a “strong dollar” policy, that could pose a challenge. The new Treasury chief just pledged to U.S. lawmakers she’d work on ways to “put effective pressure on countries that are intervening in the foreign exchange market to gain a trade advantage.”

“What we are seeing is only the opening gambit of central banks responding to a weaker dollar environment,” said Alan Ruskin, chief international strategist at Deutsche Bank AG, who’s been analyzing markets for more than two decades. While the steps so far are short of en-masse manipulation, “this is something for the market and the incoming Biden administration to watch closely.”

In the early stages of the last recovery from crisis, in 2010 and 2011, a similarly loose Fed helped drive the dollar down and spurred complaints abroad. Brazil’s finance minister of the time coined the resulting tensions a “currency war.”

A decade on, there’s no immediately effective tool for the U.S. to deal with the issue. The Treasury Department’s semiannual foreign-exchange report, where it puts countries on a watch list and can label them as manipulators, has proved ineffective. Switzerland and India, which the Treasury publicly shamed for their interventions in December, have outright ignored the U.S. and are continuing aggressive moves.

The Treasury’s report “is broken,” Marc Sumerlin, the founder of Evenflow Macro and a former White House economic official in the George W. Bush administration. “There was never a huge amount of leverage with the report anyway -- it was always a shaming document -- but with how it’s been politicized, it has even lost the shaming element.”

Concerns about politicization increased when former Treasury Secretary Steven Mnuchin labeled China a manipulator in August 2019, outside of the usual release and in the midst of President Donald Trump’s escalation of pressure on the country to get a trade deal. Mnuchin removed the designation just before the trade agreement was signed in January 2020. Mnuchin and Trump had also repeatedly endorsed a weaker dollar, and even weighed driving it down.

Yellen didn’t reprise their stance on the dollar in comments to the Senate Finance Committee last week. But when asked specifically whether she believed in a strong dollar, she said that she believed in “market-determined exchange rates” and that the U.S. “does not seek a weaker currency.”

That amounted to saying “the dollar can go down if it wants to, I’m not going to have my fingerprints on it,” Sumerlin said.

And it left nothing for foreign policy makers, who in the pre-Trump era would highlight the official U.S. “strong dollar” stance at times when their own currencies were showing unwanted appreciation. Now they have to choose between allowing gains that hurt their economy’s competitiveness and reflation campaigns, deploying their own verbal jawboning, or intervening.

Most recently, the European Central Bank chimed in, saying it has the necessary tools -- including interest-rate cuts -- to prevent a strong euro from undermining its inflation goals. Officials from economies including Taiwan and Thailand term their currency sales as smoothing operations, not manipulation.

A Treasury spokeswoman, asked for comment on other countries’ moves to sell their currencies, referred to Yellen’s remarks to the Senate Finance Committee.

Yellen told lawmakers the Treasury and other agencies will examine how to “work together to put effective pressure on countries that are intervening in the foreign exchange market to gain a trade advantage.”

But she also said that bilateral trade deficits shouldn’t be seen as “a single catch-all metric.”

How patient U.S. lawmakers will be if others are ramping up their intervention remains to be seen.

The key will be to watch what China does, given the outsize U.S. trade deficit with the country, said Zach Pandl, co-head of global currency and emerging-market strategy at Goldman Sachs Group Inc.

“There are other countries where they are concerned about their currency manipulation,” Pandl noted. “But the key thing with their policy is China.”

--With assistance from Subhadip Sircar, Catherine Bosley, Simon Flint and Livia Yap.