US Dollar Steadies as Euro Outlook Deteriorates after White House Floats China, EU Tariffs and Threatens WTO Withdrawal

-USD steadies after White House threatens China, EU with more tariffs.

-Targets China with higher tariffs, vents over EU trade, threatens WTO.

-USD to remain bid as tensions weigh on Euro and risk assets broadly.

© Shealah Craighead, The White House

The Dollar stabilised close to an August low on Friday as traders await further clarity on reports President Donald Trump is eager to push ahead with higher tariffs on Chinese exports as soon as next week, and that it is gearing up for another showdown with the EU, which has put the so called "trade war" back on top of the agenda for markets.

Bloomberg News reported late Thursday that President Trump wants to impose a 25% tariff on $200 billion of Chinese exports to the US as soon as a public comment period on the proposed levies comes to an end next Thursday. 

The comments came as part of an interview in which the US president also renewed criticism of the World Trade Organization, saying he would withdraw the US from it if the international body does not "shape up". It's not yet clear what kind of impact this would have on the world's largest economy.

Originally the proposed tariff rate was supposed to be 10% but was increased to 25% at the beginning of August. Reports of further action come after US-China talks ended in Washington last week with few signs of any progress.

"The end of the summer in Beijing has brought with it a hardening of views on the trade dispute with the US. Increasingly, tariffs are being seen not as negotiating ploys to win run-of-the-mill concessions from China but as elements of a containment strategy that China cannot afford to give ground to," says Mark Williams, chief Asia economist at Capital Economics. "The high profile that this bleaker assessment is receiving makes it less likely that China’s leadership will seek compromise." 

The White House has announced tariffs on more than $250 billion of Chinese imports, citing the country's failure to address concerns over "unfair trading practices" that include "forced technology transfer and intellectual property theft". 

China retaliated with levies on $50 billion of US goods and has threatened to target another $60 billion if the US goes ahead with the next round of tariffs. 

The White House is also reportedly unimpressed by the progress to date in trade talks between the US and European Union, with Trump saying in an interview that the EU is "Almost as bad as China, just smaller.”

This comes after Cecilia Malmstrom, the EU Commissioner for international trade, told a European parliament committee the EU is prepared to remove all tariffs on US cars in order to avoid being roped into President Trump's trade war.

"The potential escalation of the US-EU trade wars remains the key risk to EUR as the initial reaction would be EUR negative (given the openness of the EU economy vs US as well as the pro-cyclicality of the euro). All this suggests that the current challenging environment for EM FX should remain unchanged," says Chris Turner, global head of currency strategy at ING Group.

The US Dollar index was quoted 0.07% lower at 94.64 during early trading Friday while the Pound-to-Dollar rate was 0.04% lower at 1.3004 and the Euro-to-Dollar rate was 0.16% higher at 1.1684.

Global stock markets fell overnight and into the morning session Friday while oil prices were lower and gold futures were higher.

The FTSE 100, an index with broad international diversification, was down 0.40% at 7,485 in London while the German DAX was 0.78% lower at 12,397 in Frankfurt.

"EUR traders have to fear that Trump will take a tougher approach on the EU in the future. That increases the uncertainty for the real economy and increases the forecasting uncertainty for the ECB so that the EUR outlook deteriorates somewhat again," says Esther Reichelt, an analyst Commerzbank.

White House hostility toward the EU and its trade policies follows an earlier agreement between President Trump and European Commission chief Jean-Claude Juncker to negotiate a resolution of differences in order to avoid a Transatlantic tariff fight. 

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.

Thursday's comment that the EU automotive proposal is "not good enough" could now see markets begin to fret that a Transatlantic "trade war" is only a matter of time. 

The Dollar index has now converted a 4% 2018 loss into a 2.5% profit during the four months since the middle of April, following a sustained rally that drew a line beneath a prior 12-month period of heavy losses.

Concerns about an all out tariff fight between the world's largest economies have helped ensure the US Dollar remained bid during recent months, although most analysts now agree that much of the Dollar's gains have been driven by US economic fundamentals.

Superior levels of US 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 created an incentive for traders to sell other developed world currencies and buy US Dollars.

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