From trade to currency war

The words of the US president Donald Trump addressed against the president of the European Central Bank Mario Draghi, accused of being a manipulator of the euro with the intent to obtain an advantage for the economy of the eurozone, risk causing an escalation of tensions able to transform the current commercial war in which the United States and China are involved in a global currency war, with central banks used as a weapon to devalue the domestic currency. On the other hand, President Trump would like the Federal Reserve to support its goal of weakening the dollar, to make US-made products more competitive.
Certainly, one of the main advantages of modern economic policy is having central banks independent of the executive power. The Federal Reserve and the European Central Bank are the best examples. Yet even this principle is now being questioned, due to the unprecedented pressure exerted by political leaders, who would like to see ultra-expansionary monetary policies, low interest rates and a high money supply. Also, and not least, to depreciate domestic currency against others, and thus obtain an advantage in terms of greater exports, considering that, in a globalized economy, penetration into other markets is one of the main key drivers to increase GDP.
Yet even the promise of monetary easing recently made by the two most important central banks risks producing limited effects on the economy and, consequently, on the ForEx markets. With governments increasingly indebted and almost zero spaces left to fiscal policies, the only remaining stance for politicians is to be able to count on a central banker who implements an expansive monetary policy. In the case of the US, this should make up for the ineffectiveness so far of the tariff policy, which has certainly not helped to reduce Washington’s huge trade deficit, as hoped by Trump himself. Or the big tax cut, the effects of which could be limited over time. So then, when you failed to increase the prices of other countries, you would now like to get lowered yours. The problem is that central banks do not pursue a foreign exchange target nor could they do so, considering how much ForEx markets are governed more by private than public variables. For this reason even the currency war, like the trade one, could result in a new stalemate for Donald Trump.