The US Dollar Slips Against Safe Haven Currencies As The Trade War Deepens
The U.S.-China trade war escalated on Friday when the U.S. followed through its threat to increase tariffs on Chinese goods. To be sure, the U.S. upped tariffs from 10% to 25% on Chinese goods worth $200 billion. As such, traders flooded in the haven assets as fears of an all-out trade war deepened. Consequently, the US dollar is taking a hit in the market.
Haven currencies gain popularity
To be sure, the greenback slid against the Japanese yen and the Swiss franc as traders try to hedge their investments against risk. For starters, the two currencies are very risk averse hence the tendency for traders to snap them up any time risk sentiment declines. On Monday, the USD/JPY pair declined 0.8% to 109.09, levels last seen early February. Also, the market seemed to take up more Swiss francs as the USD/CHF pair slipped 0.6% to 1.0054, a one month low.
The take up of the Japanese yen and the Swiss francs is an obvious strategy by investors. Notably, the two currencies are risk averse, and their popularity indicates that risk sentiment is sour. Traders buy haven assets when there is a threat of market disruption by a globally destabilizing force. Interestingly, the ongoing trade war between China and the U.S. fits this definition of a destabilizing force.
China responds with a fresh round of higher tariffs
For starters, the trade war stretches back to 2017 when the U.S. first imposed light higher tariffs on certain goods from China in a bid to force a trade balance between the two economies. However, China retaliated, and the two countries agreed to begin talks toward resolving the underlying issues. However, things worsened on Friday when the U.S. hiked tariffs on some Chinese goods citing a breakdown in the talks. Interestingly, China retaliated with several categories of increased tariffs on $60 billion of American goods including a 25% tariff on liquefied natural gas.
The greenback and the red back are both loosing from the trade war
The retaliation by China has adversely affected the major indices in the U.S. To be sure, the Dow lost around 700 points at some point in the Monday trading session. Also, the US dollar index slipped 0.2% and settled at 96.91. As such, it is highly likely that the index may not breach the 98 marks for the rest of the year if the trade war drags on for the rest of the year.
On the other hand, the Chinese yuan is also taking a lot of heat from the latest developments. In particular, the currency declined to 6.92 in the immediate aftermath of the fresh round of higher tariffs by the U.S. This is a level last experienced in December 2018 and reports indicate that China could intervene to avoid a slip of the yuan beyond 7 to the greenback. Therefore, this is strong evidence that the trade war is worsening the situation which triggered the tariff hikes in the first place.