The US Treasury has labelled Switzerland and Vietnam currency manipulators, escalating tensions with the two countries in the waning days of the Trump administration.

Washington could take punitive action unless “bilateral engagement” satisfies its concerns, even after the dollar has itself dropped to more than two-year lows.

In a statement accompanying its semi-annual foreign exchange report, the US Treasury said the two countries had held their currencies lower to prevent “effective balance of payments adjustments” and in the case of Vietnam, “for gaining unfair competitive advantage in international trade”.

During Donald Trump’s presidency, the US Treasury has taken a more aggressive approach to currency practices. This latest step will present a dilemma for the incoming Treasury in Joe Biden’s administration, which will be led by former Federal Reserve chair Janet Yellen.

The Trump administration labelled Beijing a currency manipulator at the height of the trade war between the US and China in 2019. But it dropped the label in January 2020 after the “phase 1” trade deal struck between Mr Trump and China’s President Xi Jinping.

In the latest report, China remained on the Treasury’s currency monitoring list, which also includes Japan, South Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand and India. The last three were added to the watchlist on Wednesday, while Ireland was removed.

Line chart showing the dollar trades at a two-year low

“The Treasury department has taken a strong step today to safeguard economic growth and opportunity for American workers and businesses,” said Steven Mnuchin, the US Treasury secretary. “Treasury will follow up on its findings with respect to Vietnam and Switzerland to work toward eliminating practices that create unfair advantages for foreign competitors.”

A senior Treasury official said the US aimed to “resolve our issues” with Vietnam and Switzerland within a year, before Washington would proceed with remedies. Punitive measures could range from restrictions on access to procurement to tariffs. The Vietnamese embassy in Washington did not immediately respond to a request for comment.

The Swiss National Bank said it would not change its approach. It denied “any form of currency manipulation” and said it “remains willing to intervene more strongly in the foreign exchange market”.

“Foreign exchange market interventions are necessary in Switzerland’s monetary policy to ensure appropriate monetary conditions and therefore price stability,” it added.

Robin Winkler, a currency strategist at Deutsche Bank, said the Biden administration would be less likely to impose sanctions than its predecessor.

“During the Obama years, the Treasury used to cut the Swiss considerable slack, acknowledging that the small domestic bond market constrained the scope for ‘traditional’ quantitative easing,” Mr Winkler said. “So I doubt the market will see this as undermining the SNB’s credibility in capping Swiss franc strength.”

Line chart showing the Swiss National Bank’s struggle with the franc

The Swiss franc acts as a haven for investors and tends to rise in times of stress. The central bank maintained a rigid upper limit on the franc for four years until 2015, and since then it has held interest rates far below zero and continued to sell francs against the euro in times of rapid appreciation in its currency.

Mark Sobel, a former Treasury official and chairman of policy think-tank OMFIF, said the report should have taken into account mitigating circumstances. “Treasury may be questionably branding Switzerland and Vietnam while missing more obvious cases of harmful currency practices,” he said.