The Trade War Between China And The U.S. Might Be Strengthening The US Dollar

The Trade War Between China And The U.S Might Be Strengthening The U.S Dollar
Bill Cascade   NEW 23/08/2019 00:00:00 Forex

The US dollar continues to surge despite the U.S. is locked in a trade standoff that has gone on for multiple months. During this time, President Donald Trump has accused the Federal Reserve of failing to implement more interest rate cuts to control the Dollar's growth.

POTUS, therefore, believes that the Federal Reserve has been sanctioning the US dollar's surge by failing to implement more rate cuts.

However, the same trade war that President Trump ignited with China has been the actual reason behind the Dollar's performance. This means that POTUS might be the one to blame.

Just this year alone, investors have seen the dollar surge against ten other major currencies. This is despite the narrower premium on treasury yields adjusted for inflation versus the treasury yields of other major markets. Real yields also indicate that investors might be concerned that the trade war is maintaining the Dollar's strength.

The Dollar's rising value also encouraged investors to embrace riskier investments such as stocks, and this, in turn, resulted in a rise in the U.S. debt yields. This improved performance for the U.S. debt yields and the Dollar have been on the rise because policymakers across the world have been talking about implementing economy-stimulating policies. This has, in turn, given investors hope about the potential of better gains.

EUR/USD Forex Chart

Source

The Dollar's rally is apparent in the EUR/USD currency exchange rate as seen above. The bearish performance is a sign that either Euro is performing weaker, or the Dollar has been growing stronger. The EUR/USD exchange rate peaked at 1.1113 on Monday before turning bearish and reaching the day’s low at 1.1076.

The dollar might continue to gain against the Euro if the upcoming Eurozone inflation data fall short of estimates. Lower than anticipated Eurozone inflation data would reduce the likelihood of quantitative easing methods being reintroduced by the central bank.

Eurozone inflation data has in the past demonstrated a tendency to miss analyst expectations.

The impact of the trade war on the Yuan 

A few weeks ago, there were high hopes of the China-U.S. trade war coming to an end, a situation which would have helped to ease the pressure on the global economy. It would have also helped facilitate trade between the two countries, a move that would, in turn, benefit traders and companies in both countries. However, those talks failed to yield the anticipated results. 

Consequently, the Chinese Yuan took a massive dive that saw its value cross a key resistant level at 7 Yuan per Dollar. This situation prompted President Trump to react by accusing China of currency manipulation. Letting the currency slip beyond that key level would reduce the impact of the U.S. tariffs on Chinese products imported into the U.S.

The Yen’s performance has also been subdued by the mounting pressure from the People's Bank of China (PBOC) which set a slightly lower lending rate. This was part of the adjustments that China has been making in response to the changing economic situation.

 

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