Trade Wars: Analyst Views on US Dollar and Wider Market Implications

- US Dollar is down after White House targets China with tariffs.

- China retaliates against metal tariffs, threatens further response.

- Fears of a trade war escalate, analysts give views on the USD. 

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The US Dollar fell broadly against many of its major rivals during early trading Friday as markets responded to mounting fears of a possible trade war between the United States and China. 

Fears come after President Donald Trump signed an order requiring around $60 billion of tariffs on goods imports from China, citing section 301 of the Trade Act 1974, which has already drawn threats of retaliatory action from the Chinese. The exact goods targeted by the tariffs will be announced in the next fortnight, although it is thought they will be in the telecommunications and intellectual property space.

"We have a tremendous intellectual property theft situation going on, which likewise is hundreds of billions of dollars. And that’s on a yearly basis," says President Trump, in a statement from the White House. "We’re going to be doing a Section 301 trade action. It could be about $60 billion but that’s really just a fraction of what we’re talking about."

The Trade Act 1974 gives the White House broad powers to take action against foreign countries where they are perceived to have violated trade agreements, international norms or otherwise behaved in an unreasonable manner. Discretion rests solely with the President so legislation or voting in Congress is not required for the White House to take action.

"The United States disregards China’s efforts to strengthen the protection of intellectual property rights, ignoring the rules of the WTO and ignoring the voices of the broad masses of the industry. It is unilateralism and trade protectionism. China firmly opposes it," says the Ministry of Commerce of the People's Republic of China, in a statement. "China does not want to fight a trade war, but it is absolutely not afraid of a trade war. We are confident and capable of meeting any challenge. It is hoped that the U.S. side will be able to make a swift decision and not to drag bilateral economic and trade relations into danger."

President Trump's latest move comes closely on the heels of another decision, on March 09, to levy new tariffs of 10% and 25% respectively on imports of aluminium and steel into the US, citing state subsidies and anti-competitive dumping of products on the US market. China retaliated against these tariffs on Friday. 

Fears are that an increase in so-called protectionism from the White House will lead to a vicious cycle of retaliatory actions between the US and other countries. While most economists agree this will be bad for economic growth in the US and elsewhere, opinion is divided over the implications for the US Dollar. 

The US Dollar index, a measure of the greenback against a basket of other currencies, was quoted 0.10% lower at 89.72 during morning trading Friday. The Pound-to-Dollar rate was 0.10% lower at 1.4097 while the Euro-to-Dollar rate was 0.01% higher at 1.2325. The USD/JPY exchange rate was 0.04% lower at 104.91.

Friday's price action marks a reversal from that seen late on Thursday, when the White House signed the 301 order, which could be a symptom of market jitters over China's retaliation and threat of further measures to come.

Below is a compilation of analyst comments on what all of this may mean for the US greenback and other currencies in the short term.

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Analyst Views:

Chris Turner, head of FX strategy, ING Group

"Yesterday’s announcement of 25% tariffs on up to US$60bn worth of Chinese imports is clearly an escalation – and started to elicit some retaliation from China." 

"A weaker dollar is clearly part of the Trump economic plan. Suffering a large net foreign liability position (around US$8trn), the dollar looks exposed if the investment environment deteriorates."

"It is no surprise that the safe haven JPY and CHF are out-performing right now. And with global equity markets still adjusting, we continue to see more downside for DXY. 103.80 was our forecast low for USD/JPY this week and could be seen today as risk assets tumble."

Hans Redeker, head of FX strategy, Morgan Stanley

"The USD is set for a corrective but tradable rally, aided by diverging global growth and waning risk appetite. Should trade issues escalate from here, the US economy may initially suffer less than its trading partners."

"Expansionary fiscal policy should help to protect demand at least initially,and a gain in the trade balance is a net positive for GDP growth, all else equal."

Economic growth differentials favouring the US economy, coupled with global growth weakening, creates a perfect environment for a USD rally."

Piet Lammens, analyst, KBC Markets in Brussels.

"The risk-off context might also be slightly sterling negative."

Esther Reichelt, analyst, Commerzbank

"A transatlantic trade war with Europe has been averted – for now. US President Donald Trump has exempted the EU countries from import duties on aluminium and steel. Instead the US administration is introducing duties on Chinese imports worth USD 60b...That suggests that for the time being at least the trade war will be fought in Asia." 

"It is hardly surprising that this left the US stock market feeling like the morning after the night before. What will be decisive now is whether this is transferred onto the entire economy. We stick to our view that the protectionist measures introduced so far point towards real USD appreciation."  

"The latest developments in the trade disagreements are likely to have contributed their share to the rise in risk aversion, which pushed USD-JPY below the 105 mark overnight. However, also Trump’s announcement that his security advisor H.R. McMaster was going to be replaced with yet another hardliner, the former US ambassador with the UN, John Bolton, is also likely to have played a role in that."

Miles Workman, Economist, ANZ Research 

"The big question is where to from here? While signing the order Trump stated “this is the first of many”. China has said they will respond with ‘measured and proportional’ levies on the US, which is expected to include imports of US automotive, soybean, aircraft and computer chips."

"Agriculture is considered a likely target because it’s one of the few sectors where America has a trade surplus with China and it’s a sector weighted towards Trump’s support base."

Harm Bandholz, CFA, chief US economist, UniCredit Bank 

"US consumers will face higher prices, while domestic businesses will feel negative consequences from the tariffs’ effects on value chains, a potentially stronger USD and likely retaliation by China. Other countries will be affected as well by effects on global value chains, as only 40% of Chinese manufacturing exports are actually made in China." 

Lee Hardman, currency analyst, MUFG

"The yen has continued to outperform during the Asian trading session resulting in USD/JPY breaking below the 105.00-level for the first time since Donald Trump was elected as President. Safe haven currencies such as the yen continue to derive support from the more risk-averse trading conditions at the start of this year."

"The Trump administration’s ongoing shift in focus towards implementing the less growth supportive parts of his policy agenda are contributing to more risk-averse trading conditions." 

Taimur Baig, chief economist, DBS Bank 

"China will likely adopt a two-pronged approach. Negotiation through diplomacy, alongside promises to import more auto, planes, and natural gas from the US...Simultaneously, Beijing will likely impose tariffs on soybeans grown in farm states that voted for Donald Trump (i.e. Arkansas, Indiana, Iowa, Missouri, Nebraska, North Dakota, Ohio, and South Dakota)."

"Other retaliatory measures from Beijing would include banning the import of genetically modified products from the US and delaying trade and investment deals signed during Trump’s earlier visit to China."

"One hope is that the US administration will reduce trade tensions after the mid-term elections this November, but this may well be wishful thinking. Repeated measures could inflict lasting harm on economies and markets, with Fed policy decision, trajectory of economic growth, the path of the USD, and the direction of long-term rates all becoming uncertain."

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