Strong dollar becomes an advantage for the US administration

When the opposing forces are not equal, the weaker one can do nothing but apply a creative approach. Beijing accused the USA of the intimidating policy and is willing to revenge for the $200-bn import tariffs. According to ING, China will limit the number of Chinese tourists allowed to visit the USA (the business is worth of $115 bn); it may also start selling out the Treasuries. Wall Street Journal, referring to the source in Beijing, suggests that it will be about stricter requirements for licensing of the US companies, about creating barriers in the issues of mergers and acquisitions, and about stricter customs control as well.

Mao Zedong claimed that it would be more efficient to cut off one finger, rather than to lose all ten ones. If the USA cuts its export into China due to the trade war, Beijing will find how to replace it. Another matter if is the trade war with China would mean restructuring the business. The whole world wants to enter China’s market that is not available. If China welcomes to its markets the Europeans and the Japanese due to the trade war and the Americans won’t be allowed, than the USA is going to have domestic problems. The presidents come and leave, but the business remains. The Congress expresses serious discontent with Donald Trump’s policy and considers a possible limiting to the imposed tariffs. The situation is going to become worse, as each policymaker, as a rule, is backed by a serious business.

Dynamics of the US imports and US exports into China

  

Source: Wall Street Journal.

In the meanwhile, the Chinese yuan and Shanghai Composite continue falling in value, but investors don’t see yuan devaluation as a deliberate measure by Beijing. On the contrary, there are rumours in the market that the rally of USD/CNY exchange rate is an advantage for Washington, due to growing risks of the capital outflow from China. The USA started “the strong dollar” policy, which can explain the greenback rise even to such safe, risk-free assets as the Japanese yen, the Swiss franc and gold. Investors seek quality and buy out the US currency even faster than Treasuries.

In addition, the producer prices growth pace at 3.4% is the best result since 2011. It increased the probability of four monetary restrictions by the Fed in 2018 up to 57%. The situation was fueled by the FOMC dove Charles Evans who claims the economy to look so strong that firms and consumers can afford higher borrowing costs. He doesn’t rule out hiking the federal funds rate twice this year.

Dynamics of the Fed four monetary restrictions in 2018
  

Source: CME Group

Divergence in the ECB and the Fed monetary policies and a high demand for the greenback due to the trade wars sent EUR/USD down below figure 17 base. Even if, according to Oxford Economics, the tariffs worth of $250 bn decrease the US GDP by 0.3 bps in 2019, global economy may decline even stringer (-0.4 bps, according to Bloomberg). In the short run, the an increase in the US CPI and core inflation higher than the announced 2.9% and 2.3% on a yearly basis may trigger another wave of buying out the greenback.

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Dollar: What Makes You Stronger?

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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