US Dollar Marches North after White House Ups the Ante in US-China "Trade War"

- USD rises as White House ups ante in US-China trade spat.

- Tariff increases from 10% to 25% follow CNY currency fall.

- China yet to retaliate but USD remains bid, risk assets lower.

© Gage Skidmore

The US Dollar rose broadly Thursday as markets responded to a decision by President Donald Trump to up the ante in the so called trade war with China, opening the door to a possible retaliation and fresh unease for markets. 

President Trump has instructed US trade representatives to increase the tariffs it levies on around $200 billion of Chinese exports, from 10% to 25%, citing China's failure to address US concerns over  "unfair trading practices" that include "forced technology transfer and intellectual property theft".

China has been quick to retaliate against most US tariff actions, although the Ministry of Commerce is yet to respond to Wednesday's announcement.

“On June 18, the President directed me to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent, in response to China’s decision to cause further harm to U.S. workers, farmers, and businesses by imposing retaliatory duties on U.S. goods. I initiated this process on July 10," says Robert Lightizer, US Trade Representative, in a statement. “This week, the President has directed that I consider increasing the proposed level of the additional duty from 10 percent to 25 percent."

The move comes after talks to avoid an escalation of the trade conflict fizzled out in June and also follows hard on the heels of a 5% fall in the value of the Renmimbi relative to the US Dollar, which was a move that many in the market say had the People's Bank of China written all over. A fall in exchange rates could neutralise the US tariffs by making Chinese goods cheaper for overseas customers to buy.

Wednesday's move means when the latest tariffs have been introduced, the White House will have imposed levies on more than $250 billion of Chinese exports to the US, although it has threatened to target the full $500 billion of goods that China exports to America each year. Fears are that a tariff fight between the world's largest economies will quickly descend into an all out "trade war" and that this will dent economic growth in all countries it touches.

The US Dollar index was quoted 0.19% higher at 94.84 during early trading Thursday while the Pound-to-Dollar rate was 0.35% lower at 1.3078 and the Euro-to-Dollar rate was 0.28% lower at 1.1629.

Global stock markets fell overnight and into the morning session Thursday while oil prices were lower and gold steady. The FTSE 100, an index with broad international diversification, was down 0.56% at 7,610 in London while the German DAX was 1.31% lower at 12,569 in Frankfurt.

"The news that Washington was planning to increase tariffs on Chinese goods was already making traders nervous ahead of the Fed and has been a source of USDJPY weakness," says Joel Kruger, an FX strategit at LMAX Exchange.

Wednesday's tariff announcement is all the more significant because it follows an agreement between President Trump and European Commission chief Jean-Claude Juncker to negotiate a resolution of trade differences between the US and EU. This averted a Transatlantic tariff fight and soothed market concerns over what could have descended into a global "trade war".

The White House had imposed tariffs on imports of steel and aluminium from the EU, drawing retaliatory levies on US motorcycles, jeans and whiskey while prompting threats of even more measures from the White House, this time targeting the mighty European automotive sector.

The latest action against China also comes closely behind the August interest rate decision from the Federal Reserve, which saw the US central bank leave its monetary policy unchanged but reiterate an otherwise bullish outlook for the US economy. US economic growth reached its fastest pace for four years during the second quarter, while growth in the Eurozone and elsewhere has remained tepid in the wake of a first quarter slowdown.

"We continue to reiterate that environment of US data outperformance, Fed’s hawkish rhetoric and lingering concerns of trade war are supportive of the USD. But we also believe that this USD support could be derailed if either one or more of the above variables falls out from the equation," says Saktiandi Supaat, an FX strategist at Maybank in Singapore.

Most analysts now agree that superior levels of US economic growth have bolstered the case for the Federal Reserve to keep raising its interest rate, at a time when the interest rate outlook elsewhere in the world has deteriorated, which has incentivised traders into selling other developed world currencies and buying US Dollars.

As a result America's greenback has now converted a 4% 2018 loss into a 2.78% profit during the three months since the middle of April, following a sustained rally that drew a line beneath a prior 12-month period of heavy losses.

"The outlook for Fed policy in 2019 is becoming more important for the performance of the US dollar. We and the US rate market expect the Fed to slow the pace of rate hikes in 2019 as the US economy is likely to slow as the boost from late cycle fiscal stimulus fades. As a result, we expect to see a reversal of the current level of US dollar overvaluation heading into 2019," says Lee Hardman, a currency analyst at MUFG.

The Federal Reserve has raised interest rates seven times since the end of 2015, taking the Federal Funds rate range to between 1.75% and 2%. Many economists expect it to raise rates so that the top end of that range hits 3.25% around the end of 2019. The next 2018 rate rises are seen coming in September and December. 

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