Currency war casts shadow over market
OIL TO EMERGING-MARKET ASSETS FACE COLLATERAL DAMAGE
The currency war has arrived. So say some of the best and brightest in the $5.1 trillion-perday (Dh18.7 trillion) foreignexchange market. US President Donald Trump on Friday accused China and the European Union of manipulating their currencies and interest rates lower. The comments came after the yuan plunged to its lowest level in a year, with little sign of China’s central bank intervening. They also follow a decline in the euro this year and add to the calculus that European Central Bank policymakers might need to consider when they meet this week.
As the world’s largest economies open up a new front in their increasingly acrimonious game of brinkmanship, the consequences could be dire — and ripple far beyond the US and Chinese currencies. Everything from equities to oil to emerging-market assets are in danger of becoming collateral damage as the current global financial order is assailed from Beijing to Washington.
Real risk
“The real risk is that we have broad-based unravelling of global trade and currency cooperation, and that is not going to be pretty,” said Jens Nordvig, Wall Street’s top-ranked currency strategist. Trump’s recent rhetoric is certainly shifting this from a trade war to a currency war.
Whether the People’s Bank of China attempts to anchor the dollar-yuan exchange rate near 6.80 to avoid further escalation is key, according to Nordvig.
He says ECB President Mario Draghi may elect to step into the fray at the central bank’s July 26 policy meeting.
The Bloomberg Dollar Spot Index fell as much as 0.8 per cent Friday, the most since March. The euro ended the day up 0.7 per cent at $1.1724, while the yen was almost 1 per cent stronger.
The greenback will likely continue to suffer as investors heed Trump and back out of long dollar wagers, according to Shahab Jalinoos, Credit Suisse Group AG’s global head of FX trading strategy.