An unwanted result of trade war
Trump seeks a weaker dollar, but he keeps strengthening it by stoking fears over his battle with China.
No wonder he’s frustrated: President Trump’s intensifying battle with China and other major trading partners is turning into a global currency war, and it will be hard for him to win both.
The president once again bemoaned the dollar’s strength Thursday, calling in a tweet for policymakers to slash interest rates. Yet the trade tensions he has stoked have supported the currency this year.
They’ve boosted demand for the greenback by helping fuel a mammoth bond rally as investors seek out the safest assets, particularly Treasury issues. Foreign ownership of U.S. government debt has swelled to record highs, pushing yields to the lowest since 2016 on 10year notes, a benchmark for global borrowing.
Trump has repeatedly nagged the Federal Reserve to cut borrowing costs while complaining that the dollar is too strong. If the Fed cuts interest rates further this year, the monetary easing may actually shore up the U.S. economy, supporting the dollar. And that may only add to Trump’s frustration. Options traders this week increased their wagers on a weaker yuan versus the dollar.
“Whether President Trump can win the trade war and the ‘FX war’ seems rather doubtful,” said Kit Juckes, a global strategist at Societe Generale in London. “If he wants a weaker dollar, he should want a stronger yuan and euro. Unfortu
nately for him, this trade rhetoric has had the opposite effect.”
The dollar has strengthened about 2.5% against the euro and 2.4% against the onshore yuan this year and is holding near its 2019 high on a trade-weighted basis. Trump’s latest threat of more tariffs on Chinese goods helped push the yuan past a psychological threshold of seven per $1, the level defended by the authorities in the past.
“The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing, John Deere, our car companies, & others, to compete on a level playing field,” the president tweeted.
Hours earlier, the yuan edged higher against the dollar after China’s central bank set the daily yuan rate stronger than analysts expected, providing some reassurance to traders rattled by a tumultuous week in markets.
Options traders are paying more to bet on the dollar strengthening versus the yuan in the next three months, according to currency options prices. Nordea Bank on Thursday raised its forecast for the dollar, citing factors including the “escalated tariff war.”
The question now is whether China will allow that to happen, and what Trump may do in response.
In the eyes of some analysts, further yuan weakness could raise the risk of currency intervention by the United States to weaken the dollar. It hasn’t taken that