Former Federal Reserve Vice Chairman Alan Blinder told CNBC on Monday that he would not be surprised if the U.S. were to retaliate against China in the currency markets.
Asked whether the Trump administration might try to lower the dollar after China devalued its currency overnight, Blinder said, "I do." But he added that any dollar intervention would not be major.
"The president and the secretary of Treasury have almost said that," Blinder said in a "Squawk Alley" interview, though he did not point to specific instances.
On Monday, China allowed its currency to slide to its lowest level in more than a decade. The yuan, which has long been controlled by China, hit the 7-yuan-per-dollar threshold, a move that makes Chinese exports cheaper and U.S. imports to China more expensive.
The move follows President Donald Trump's announcement last week of new tariffs on the rest of China's imports. The additional levies would take effect on Sept. 1.
Last month, the president had reportedly looked into ways to weaken the dollar to help boost the economy before next year's election. However, top Trump economic advisor Larry Kudlow and two senior administration officials had confirmed at the time the president decided not to intervene in currency markets. Meanwhile, Treasury Secretary Steven Mnuchin said last month that he would not push in the near term for policies that would weaken the dollar.
Blind said, "One of my fears for a long time as this trade war waxed and waned was that someone, and it turns out to be the Chinese, though Trump would like it to be the Americans, would resort to what we call competitive devaluations."
If the yearlong trade war between the world's two largest economies were to erupt into a full-blown currency war, Blinder argued that "nobody wins."