Although previous protectionist efforts by the U.S. have weakened the dollar, Trump’s trade war rhetorics have, contrary to expectations, strengthened the dollar against a basket of major currencies.
With U.S. President Donald Trump threatening to impose 10% tariffs on $200 billion Chinese goods, the U.S. dollar touched its 11-month high while the euro slumped. The move has prompted a swift warning from China that it would retaliate.
Despite China’s threat of retaliation, the reality is that it has little leverage over the matter given its trade surplus with the United States. It has clearly more to lose from a trade war than gain.
Until now, the tit-for-tat measures between Washington and China have had somewhat limited impact on currencies. This week’s threat however have had a stronger impact on currencies including on the Swedish crown and the Australian dollar.
The greenback rose against a basket of currencies as forex traders bet on the escalation of a trade war which will boost inflation, made U.S. imports costlier and in the process raise the prospects of more hikes in interest rates.
With Washington issuing new threats, Chinese stocks dropped by 4% while the yuan slumped to its 5-month low.
“Asian currencies and stocks are feeling most of the impact compared to Europe but that could quickly change if this escalates,” said Constantin Bolz, fund manager at Germany-based wealth management firm Portfolio Concept.
Invested rushed into currencies that are traditionally considered as safe havens.
The Swiss franc rose by 0.3% against the dollar to 0.0018 franc while the Japanese yen climbed to its highest level in a week by 0.8% against the dollar to 109.56 yen.
Traders are unsure whether the threat of a trade war will significantly impact the dollar. Previous protectionist efforts by the U.S. have weakened the dollar.
Contrary to expectations, the dollar however strengthened 0.5% against a basket of major currencies to touch $95.266, its highest since July 2017.
“If the situation were to escalate the main beneficiary would be the U.S. dollar,” said Thu Lan Nguyen, currency strategist at Commerzbank. “And of course a far-reaching trade war would be detrimental for everyone in the end, but mainly the countries whose growth heavily depends on foreign trade,” she said in reference to China.
The yuan slid to a low of 6.4490 to the dollar, its weakest since Jan. 15 2018. While the euro remained under pressure due to expectations that the European Central Bank will hold interest rates steady into 2019, and a dispute in Germany’s governing coalition.
Chancellor Angela Merkel’s Bavarian allies could stand up to her plan of limiting immigration at the German border, which could in turn destabilize her 3-month old coalition.
The Australian dollar, a liquid hedge for risk, sank to a one-year low of A$ 0.7380 on the escalating trade dispute and as base metal prices slid.
Currencies of emerging market also came under pressure with the South African rand dropping by 1.9% to touch its 7-month low of 13.9150.
The Canadian dollar, also touched its 1-year low of C$ 1.3237 before pairing some of its losses on Tuesday, before paring some of its losses on Tuesday. Investors are worried on Canada’s trade feud with the U.S.