China Trade War Will Eventually Hurt the Dollar. By Nicholas Hastings
Contrary to immediate market reaction, an escalating trade war between the U.S. and China will not be good news for the dollar.
At the moment, the U.S. currency is benefiting from fears of increased protectionism. Not only does this pose a direct threat to the global economic recovery, which raises the level of risk aversion, but it plays into the hands of the U.S., which has least to lose in a trade war.
However, deteriorating relations with China and the increased risk of China pulling out of U.S. assets longer-term will eventually hit the U.S. currency.
This is likely to come at a time when yields on U.S. assets are already making the dollar look pretty unfavorable in the eyes of international investors.
China's response to the U.S. decision to slap a 35% tax on Chinese tyre imports was swift and strong. Beijing accused the U.S. of "rampant protectionism," lodged an official complaint with the World Trade Organization and threatened to slap its own action against imports of U.S. poultry and vehicles.
This move was hardly surprising at a time when Chinese exports are suffering and concern over the domestic economic is escalating. The U.S. tax affects about $1 billion of tyre imports and could affect as many as 100,000 jobs according to Chinese state-run media.
Fear that this is the start of some 'tit-for-tat' trade war that poses a serious risk to the global economic recovery immediately sent investors scurrying back to traditional safe havens, including the yen and the dollar.
In both cases, the attraction is enhanced by the fact that both the Japanese and the U.S. economies are probably the least likely to suffer from protectionism given that they are the least dependent on exports.
Longer term, though, the dollar is more likely to come under pressure as the relations between Beijing and Washington deteriorate and investors start to worry about the risk that China will reduce its purchases of U.S. assets.
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As an importer of capital, this will make the dollar much more vulnerable, especially now that inflationary fears have subsided and long-term rates have slumped.
Over the last few days, the three-month LIBOR rate has fallen to a new record low of 0.2999%, a level even beneath similar Japanese rates. This could make the dollar even more attractive as a funding currency as investors borrow at low U.S. rates in order to fund better yielding assets elsewhere.
For the time being, though, the dollar continues to attract a certain amount of support, helped by expectations of strong U.S. retail sales later in the day. These are expected to show a 2.0% rise last month after a 0.1% decline in July.
As global stock markets posted small gains, the dollar rose to Y91.11 by 0645 GMT from Y90.63 late Monday in New York, according to EBS.
The euro fell to $1.4614 from $1.4642 but it rose to Y133.21 from Y132.71.
At the moment, the U.S. currency is benefiting from fears of increased protectionism. Not only does this pose a direct threat to the global economic recovery, which raises the level of risk aversion, but it plays into the hands of the U.S., which has least to lose in a trade war.
However, deteriorating relations with China and the increased risk of China pulling out of U.S. assets longer-term will eventually hit the U.S. currency.
This is likely to come at a time when yields on U.S. assets are already making the dollar look pretty unfavorable in the eyes of international investors.
China's response to the U.S. decision to slap a 35% tax on Chinese tyre imports was swift and strong. Beijing accused the U.S. of "rampant protectionism," lodged an official complaint with the World Trade Organization and threatened to slap its own action against imports of U.S. poultry and vehicles.
This move was hardly surprising at a time when Chinese exports are suffering and concern over the domestic economic is escalating. The U.S. tax affects about $1 billion of tyre imports and could affect as many as 100,000 jobs according to Chinese state-run media.
Fear that this is the start of some 'tit-for-tat' trade war that poses a serious risk to the global economic recovery immediately sent investors scurrying back to traditional safe havens, including the yen and the dollar.
In both cases, the attraction is enhanced by the fact that both the Japanese and the U.S. economies are probably the least likely to suffer from protectionism given that they are the least dependent on exports.
Longer term, though, the dollar is more likely to come under pressure as the relations between Beijing and Washington deteriorate and investors start to worry about the risk that China will reduce its purchases of U.S. assets.
As an importer of capital, this will make the dollar much more vulnerable, especially now that inflationary fears have subsided and long-term rates have slumped.
Over the last few days, the three-month LIBOR rate has fallen to a new record low of 0.2999%, a level even beneath similar Japanese rates. This could make the dollar even more attractive as a funding currency as investors borrow at low U.S. rates in order to fund better yielding assets elsewhere.
For the time being, though, the dollar continues to attract a certain amount of support, helped by expectations of strong U.S. retail sales later in the day. These are expected to show a 2.0% rise last month after a 0.1% decline in July.
As global stock markets posted small gains, the dollar rose to Y91.11 by 0645 GMT from Y90.63 late Monday in New York, according to EBS.
The euro fell to $1.4614 from $1.4642 but it rose to Y133.21 from Y132.71.
- 15 September |
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