U.S. Dollar: G20 No Panacea for "Trade War" because China Concerns will Linger, as Trump Threatens EU

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- Analyst advocates caution toward USD, other currencies, ahead of G20.

- Says "trade war" won't peter out on an agreement delaying tariff hike.

- And deal could simply greenlight a Trump scrap with EU over car tariffs.  

The Dollar and other currencies sensitive to news coming out of China should be approached with caution, according to analysts, because the weekend's eagerly-awaited G20 summit will be no panacea for the so-called "trade war".

America's Dollar has turned higher this week as investors responded to U.S. and Chinese officials setting out their respective stalls in the press ahead of the G20 summit in Buenos Aires, which will see Presidents from both countries discuss the tariff conflict between the two. 

Investors flock to the safe-haven Dollar during times of unease and tend to dump the greenback whenever the proverbial dust settles, suggesting the U.S. currency could weaken if an accord is struck between the two presidents this weekend. But analysts, and this week's events, are suggesting that the road ahead may not be quite as smooth or straightforward as that.

"Rhetoric has intensified ahead of the Trump-Xi meeting later this week and markets have responded in kind. While some may chalk this up to position jockeying ahead of the summit, an abrupt thawing of relations in the coming days is overly ambitious. A cautious stance on currencies exposed to China and/ or highly dependent on trade is prudent as betas to CNH come into focus," says Mazen Issa, a currency strategist at TD Securities. 

President Trump threatened Monday to raise the tariff rate on $250 billion of Chinese exports and target the remaining $267 billion of goods sent to the U.S. each year if a deal to address China's "unfair" trade practices is not reached.

With global economic growth under threat, and markets already jittery given the impact the Federal Reserve's interest rate policies are having further afield, investors are eager for an accord that will avert a further escalation in hostilities.

But even if a deal to talk some more is struck at the G20, it won't be the end of the story because the "Made in China 2025" programme at the centre of U.S. allegations of intellectual property theft cannot be easily abandoned by Beijing. 

"This backdrop suggests that currencies that have high trade exposure to China are vulnerable. Though USDCNH has been confined in a broad 6.90/7.00 range this month, we eventually look for this to push through the upper bound in the coming weeks and months. Both AUD and NZD have a higher CNH beta, giving us some comfort in our NZDNOK short," says Issa.

China's Commerce Ministry blamed the U.S. last week for a fractious end to the Asia-Pacific Economic Cooperation summit, lowering expectations for an accord at the forthcoming G20 meeting.

But for markets, even if the China dispute does take a back seat for a while, any detente could easily give way to a fresh conflict, this time involving the European Union, ensuring investors remain on edge for the foreseeable future.

"He didn’t care until I said I was going to tax his cars. And then the next day he was there at about 7:00 in the morning," President Trump told the Wall Street Journal Monday. "So far they’re talking about a deal, but it’s all talk. And I’m not going to make the kind of deal that the U.K. made, believe me." 

Trump has repeatedly threatened to target European Union car exports to the U.S. if Brussels does not reduce the tariffs it charges on imports of American goods. The EU exports €38 billion of cars to the U.S. annually, although the industry is of far greater value than that to the single currency bloc, as it employs hundreds of thousands of people across the continent.

Hostilities were put on ice in July after both parties agreed to explore ways of improving the bilateral trade relationship, but President Trump's patience now looks to be wearing thin and at least one report has suggested the White House could be preparing to target the EU with tariffs as soon as Monday. 

Wirtschaftswoche, a German business paper, reported Tuesday that EU officials expect President Trump will impose tariffs on European Union cars and automotive goods next week. 

The U.S. Dollar index was quoted 0.34% higher at 97.40 Tuesday amid broad gains for the greenback.

The Dollar advanced against all G10 currencies other than the New Zealand Dollar Tuesday, with the Pound-to-Dollar rate -0.64% lower at 1.2730 and the Euro-to-Dollar rate -0.48% lower at 1.1284.

Speculation about a possible U.S.-EU trade skirmish comes at a time when the Eurozone economy is slowing and after the German economy contracted during the third-quarter due to car industry production stoppages resulting from the implementation of new regulations governing emissions testing.  

Eurozone growth slowed from a downwardly-revised 0.6% at the end of 2017 to just 0.2% in the third quarter, denoting a broad slowdown across the bloc, while German growth fell from 0.6% to -0.2%. 

Confidence about the German business outlook nosedived during October, according to the latest Ifo Business Climate index, which fell from 102.9 to 102 during the recent month.

IHS Markit data released last week showed Germany's manufacturing sector growing at its slowest pace for more than four years during November.  

All recent data had led analysts to the conclusion that Eurozone growth has remained tepid so far in the fourth quarter, leaving many looking to the New Year for a possible rebound.

That rebound may not be quite so forthcoming if the continent is by that time, embroiled in a so-called trade war with the U.S., which will have implications for the European Central Bank (ECB) policy outlook.

For the Dollar all of this means that, despite some strategists already having called time on the 2018 rally, the U.S. currency cannot be counted out just yet.

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