Forex
Dollar is only winner from China-West trade war: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) -The only “winner” from a possible all-out trade war between the West and China will probably be the U.S. dollar.
Uncertainty around global trade policy is the highest since 2018-2019 when clashes between former U.S. President Donald Trump’s administration and Beijing reached fever pitch. It’s nowhere near those peaks yet, but will be the focus of greater attention as the U.S. presidential election draws closer.
Whoever wins in November, further tariffs on imports from China and likely retaliation seem inevitable. China already warns that a move by Europe to join the tariff train would constitute a “trade war.”
Trump’s return to the White House would raise the stakes significantly.
Rising protectionism and shrinking cross-border trade may dampen growth everywhere but the U.S. – the world’s economic and currency superpower – has layers of protection that other countries don’t.
These include the relatively closed nature of the economy, the global importance of U.S. equity and bond markets, and the ubiquity of the dollar in international reserves.
That’s not to say the U.S. won’t suffer – growth would slow and inflation might rise. But higher inflation delays or possibly eliminates Fed interest rate cuts, and growth in Europe and Asia would be more vulnerable than in the U.S.
In short, the pain is likely to be felt more acutely in other currencies, none of which have the dollar’s safe-haven status either. And in the world of exchange rates, everything is relative.
THREE TIMES THE HIT
Goldman Sachs economists attempted to quantify the risks to U.S. and euro zone growth by analyzing the 2018-2019 trade war and beyond through three lenses – U.S. and European company commentary on trade uncertainty, stock returns around tariff announcements and cross-country investment patterns.
They found that a rise in trade policy uncertainty to 2018-2019 levels would likely lower U.S. GDP growth by three-tenths of a percentage point. The estimated hit to euro zone growth would be three times greater.
For a region already expected to grow significantly slower than the U.S., at only 0.8% this year and 1.5% next year, according to the International Monetary Fund, that would be a major blow. Aggressive monetary easing from the European Central Bank could follow, undermining the euro.
“Further increases in trade policy uncertainty pose meaningful downside risk to our global growth outlook in 2024H2 (second half of 2024) and 2025 … with larger effects in economies where exports account for a larger share of GDP,” Goldman’s economists wrote on Tuesday.
CLOSED OFF
The U.S. economy is far less open than its European or Chinese counterparts, meaning disruption to trade should have a relatively limited impact.
U.S. exports of goods and services accounted for 11.8% of GDP in 2022, according to the World Bank, compared with 20.7% in China. Eurostat data shows that euro zone goods exports last year were worth 20% of GDP.
A persistent and deteriorating trade deficit for years was seen as a major drag on the dollar as the U.S. had to suck in huge amounts of foreign capital to plug the gap and prevent the dollar from falling.
But the U.S. trade deficit last year was 2.8% of GDP, much smaller than the year before and half of what it was in the mid-2000s. Onshoring, energy self-sufficiency, and a push to revive domestic manufacturing all indicate the deficit will not be the drag on the dollar it once was.
And that’s before any tit-for-tat tariff escalation potentially shrinks U.S. imports further.
EURO PARITY?
China’s domestic economic problems and geopolitical stance are enough to make foreigners wary of investing in the country. But it’s no coincidence that foreign direct investment flows into China are plunging at their fastest pace in 15 years right as trade tensions percolate again.
Chinese stocks are underperforming, barely in positive territory for this year and after a dire 2023. Beijing is struggling to hold up the yuan, which is at a seven-month low against the dollar.
European stocks and the euro have not reacted favorably to recent headlines about the tariffs Brussels is slapping on certain imports from China. Given how close trade ties are now between the euro zone and China, this should be no surprise.
The euro zone imports more goods from China than anywhere else in the world, and the yuan’s weighting in the trade-weighted euro rivals that of the dollar. Trade tensions between China and Europe will hit the euro hard.
And with the euro having a near-60% weighting in the broader , there is a naturally strong inverse correlation between the euro’s fate and the dollar.
Analysts at Deutsche Bank predict that the dollar will stay “stronger for longer” this year and into next year, although momentum may fade as the cycle gets longer in the tooth.
A more belligerent stance on trade from whoever wins the White House in November, however, would be a major dollar-positive development and probably push the euro back down towards parity.
“The dollar is under-pricing risks from U.S. protectionism,” they wrote on Wednesday.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Paul Simao)
Investing.com– Most Asian currencies weakened slightly on Friday as the dollar retained a bulk of its weekly gains on expectations of a slower pace of interest rate cuts by the Federal Reserve.
The Japanese yen steadied near its weakest level in three months as Japan geared up for a tightly contested general election over the weekend, while verbal warnings on potential currency market intervention also kept traders skittish towards the currency.
Most Asian currencies were nursing losses this week as a mix of factors dented risk aversion, although the yen- traditionally a safe haven- was the worst performer this week.
USDJPY steadies near 152 with election, intervention in focus
The yen’s pair steadied near thee-month highs around 152 yen, and was headed for a 1.6% gain this week- its fourth consecutive week of gains.
Sentiment towards Japanese markets was largely on edge before a general election on Sunday, where local polls showed an alliance led by the ruling Liberal Democratic Party could struggle to reach a majority.
This could lead to Prime Minister Shigeru Ishiba facing an uphill battle to enact more economic reforms, while increased political uncertainty is also expected to undermine expectations for more interest rate hikes from the Bank of Japan.
Consumer inflation data from Tokyo showed inflation eased slightly less than expected in October, but fell below the BOJ’s 2% annual target. The data usually heralds a similar reading from nationwide inflation data.
The yen saw some strength after government officials kept up their warnings of potential intervention in the currency market, given recent weakness in the yen.
Dollar set for fourth week of gains
The and steadied in Asian trade, and were headed for a fourth straight week of gains. The greenback was trading up about 0.6% this week.
In addition to bets on smaller rate cuts, the dollar was also buoyed by increasing bets that Donald Trump will win the 2024 presidential elections. Recent polls and online prediction markets put Trump ahead of Democratic nominee Kamala Harris.
Trump’s policies are expected to be inflationary, presenting a higher outlook for U.S. rates in the long term.
Concerns over stickier U.S. interest rates sparked weakness in Asian markets, with most regional currencies headed for weekly declines.
The Chinese yuan’s pair rose 0.1% on Friday and was set to rise 0.3%. A meeting of China’s National People’s Congress, initially slated to take place in late-October, now appeared to be delayed to November.
The Australian dollar’s {{|AUDUSD}} pair fell 0.3% on Friday, while the South Korean won’s pair surged 0.7%.
The Singapore dollar’s pair rose 0.2%, while the Indian rupee’s pair hovered close to record highs.
By Chuck Mikolajczak
NEW YORK (Reuters) -The euro and Japanese yen strengthened on Thursday as the U.S. dollar paused after rallying to a nearly three-month high, with the greenback only briefly moving off earlier lows as data supported views for slower rate cuts by the Federal Reserve.
Weekly initial jobless claims fell to 227,000, below the 242,000 estimate of economists polled by Reuters, while continuing claims rose to a nearly three-year high. The Fed is likely to discount the climb earlier in claims this month due to distortions from Hurricane Helene.
A separate report from S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to 54.3 this month from a final reading of 54.0 in September. A reading above 50 signals expansion.
The greenback has climbed in 16 of the past 18 sessions, on pace for its fourth straight week of gains, as a run of positive economic data has quieted expectations about the size and speed of the Fed’s rate cuts, which has also lifted U.S. Treasury yields.
“We’re looking at some profit-taking here,” said Joseph Trevisani, senior analyst at FXStreet in New York.
“But underneath that, of course, has been the shift in rates and the shift in perception about what the Fed is going to do. And that hasn’t changed so for the moment, we’re kind of holding.”
The yield on benchmark U.S. 10-year notes fell 4.6 basis points to 4.196% after hitting 4.26% in the prior session, its highest in three months.
The , which measures the greenback against a basket of currencies, fell 0.37% to 104.05, its first decline after three straight sessions of gains, with the euro up 0.39% at $1.0823 after hitting a nearly four-month low of $1.076 on Wednesday.
A survey showed euro zone business activity stalled again last month, but the contraction in Germany, Europe’s largest economy, was less steep than the previous month.
Recent comments from Fed officials have indicated the central bank will take a gradual approach to cutting rates. Inflation pressures have been easing but still have yet to return to where they need to be, said Federal Reserve Bank of Cleveland President Beth Hammack on Thursday.
Markets are pricing in a 95.1% chance for a cut of 25 basis points at the Fed’s November meeting, with a 4.9% chance of the U.S. central bank holding rates steady, according to CME’s FedWatch Tool. The market was completely pricing in a cut of at least 25 bps a month ago, with a 58.2% chance of a 50 bps cut.
In contrast, expectations for faster and potentially bigger rate cuts from the European Central Bank (ECB) have increased to weigh on the euro, after a host of policymakers warned about the risk of undershooting the central bank’s 2% inflation target.
ECB policymaker Robert Holzmann said the central bank could cut rates by 25 basis points at its December meeting if circumstances including inflation allow it. Latvian central bank Governor Martins Kazaks said inflation could fall quicker than expected but the ECB should stick to its practice of cutting rates step by step given the exceptional uncertainty.
The dollar has also benefited from a rise in market expectations for a victory next month by Republican candidate and former U.S. President Donald Trump, which would likely bring about inflationary policies such as tariffs.
Sterling strengthened 0.39% to $1.2971. British finance minister Rachel Reeves said she would change the measure of public debt that the government targets in next week’s budget to allow more borrowing for investment.
Against the Japanese yen, the dollar weakened 0.6% to 151.83.
BOJ Governor Kazuo Ueda said the recent fall in the yen was partially driven by optimism over the U.S. economic outlook, and the central bank needs to scrutinize further whether that optimism is sustained.
Ahead of Sunday’s election, polls showed Japan’s coalition government Prime Minister Shigeru Ishiba’s Liberal Democratic Party may struggle to retain its parliamentary majority, which could complicate monetary policy plans by the BOJ.
Investing.com – The U.S. dollar held largely steady Friday, on course for a fourth straight week of gains, underpinned by falling expectations of aggressive Fed rate cuts as well as heightened political uncertainty.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 103.880, still on track for a weekly gain of around 0.6%.
Dollar steadies ahead of payrolls
The dollar has steadied Friday after a slight fall in the previous session on the back of lower U.S. Treasury yields.
However, it has generally been in demand for much of the month as reasonably healthy economic data has seen the market scale back expectations of more hefty rate cuts by the Federal Reserve in the near future.
This relative calm could disappear next week, with a highly consequential U.S. report due next Friday.
However, ahead of this release, the focus may well be on the upcoming US presidential election, as market bets for a possible return of Donald Trump ramp up.
“The polls are clearly telling us the election is too close to call, but markets and betting odds are leaning increasingly in favour of Trump,” said analysts at ING, in a note.
“This may be due to the experience of the past two elections, where Trump was underestimated by polls, but also by greater hedging demand for a Trump presidency, which is seen as a more impactful macro/market event due to protectionism, tax cuts, strict migration policies and risks to the Fed independence.”
ECB to consider large cut?
In Europe, edged marginally higher to 1.0833, on track for a weekly loss of more than 0.3%.
The rose slightly in October, data showed Friday, but sentiment remains weak after eurozone business activity stalled again this month.
The has already cut rates three times this year, each time by 25 basis points, but expectations are growing that the central bank will consider a larger reduction at its next meeting.
“Bundesbank president Joachim Nagel was asked on two separate occasions during his stay in Washington whether he would consider a 50bp cut in December, and both times, he refrained from explicitly pushing back,” said ING. “Nagel is one of the most hawkish members of the Governing Council and would have probably answered with a clearer ‘no’ only a month ago.”
traded largely unchanged at 1.2972, heading for a weekly loss of around 0.5%, but has also edged away from a two-month low seen on Wednesday.
Bank of England Governor speaks on Saturday in Washington, and traders will be looking for any comments on likely future policy after he warned earlier this month that the central bank could become “a bit more activist on rate cuts” if there’s further good news on inflation.
Yen looks to weekend’s election
rose 0.1% to 152.02, steadied near three-month highs, with the pair headed for a 1.6% gain this week – its fourth consecutive week of gains.
Sentiment towards Japanese markets was largely on edge before the general election on Sunday, where local polls showed an alliance led by the ruling Liberal Democratic Party could struggle to reach a majority.
This could lead to Prime Minister Shigeru Ishiba facing an uphill battle to enact more economic reforms.
edged higher to 7.1209, trading in a tight range with a meeting of China’s National People’s Congress, initially slated to take place in late-October, now appearing to be delayed to November.
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