The markets don’t respond to Donald Trump’s activities in the way the U.S. president would like

Plans are a good breakfast, but a bad dinner. Donald Trump wanted to settle the U.S. foreign trade problems by means of imposing import tariffs and devaluing dollar. He liked the example of the 1990s and the 200os, when the greenback was losing in price amid the new tariffs and the conflict between Washington and Tokyo. The matter is that the markets aren’t staying still; they are constantly changing and the former patterns are getting irrelevant. A new round of trade battles triggered another wave of the U.S. dollar purchases.

China is not willing to be pushed about by blackmailers. It suggests the USA should switch on its common sense and stop acting in a rage, as it is going to hit its own economy in the end. Beijing is going to retaliate on $200-bn import tariffs, as they threaten peaceful coexistence. China sees Washington’s measures as blackmailing, for Donald Trump and his team threaten at first, and, next, suggest negotiating. China won’t put up with such a tactic.

Escalation of trade tensions result in strengthening the U.S. dollar for some reasons. First, it slows down China’s economy, which is clear from Purchasing Managers Index changes. As a result, the developing economies’ currencies are being sold actively. Second, a poorer risk appetite increases a demand for safe-heaven assets, and dollar looks more appealing than gold or yen. Third, following China’s economy, global GDP growth is slowing down as well. It is indicated by changes in global PMI.

Dynamics of Chinese PMI

Source: Financial Times.

Dynamics of global PMI

Source: Financial Times. 

The USD index usually goes up when the U.S. economy leaves the world behind. That is when the U.S. GDP is growing faster than the global indexes, including the developing economies that are traditionally fast. Remember early 2018, when strong economic expansion in China, Japan, Germany and other nations and closely connected to them bearish consensus forecast for the greenback. Trade wars and the fiscal stimulus completely changed the situation. The U.S. GDP is up at 4.1% Q-o-Q in the second quarter, but global economy is slowing down. Both the euro-area and China have been affected by the U.S. import tariffs.

Since Donald Trump became the president, the U.S.-China trade deficit has expanded by 8%. His strategy doesn’t work, first of all, due to USDCNY growth. The most flattering for the U.S. president explanation is that the market believes the USA to win the trade war, so, dollar is growing, and China -to lose. So, yuan is falling down. However, flattery often results in a loss.

Trade wars distract investors from important report on the U.S. employment in July. Non-farm payrolls during the first half-year were increasing by 215,000 on average, which is much more than in 2017 (+184,000). It is not surprising. The reason is the fiscal stimulus that is mostly included in EURUSD quotes. So, the positive news can well draw euro down to 1.1535 and 1.151, where bulls will come down to business.

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Price chart of EURUSD in real time mode

Dollar: Illusion and Reality

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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