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US dollar: The trade war continues to dominate US and global economics

This article is an extract from the latest edition of the OFX Currency Outlook. To learn more about the US dollar and other major currencies and how your global business can prepare for the months ahead, download the full edition here.

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The trade war continues to dominate US and global economics and hopes rest on October talks

The ongoing US-China trade war continues to dominate the US economy and politics, ahead of the next round of talks between the two sets of officials, trying to achieve a solution that could bring respite to the global economic downturn.

The irony of the current position with President Trump is he is pushing the Federal Reserve to cut interest rates in a bid to weaken the US dollar. But it is a major flight-to-safety currency, which will always strengthen when there is uncertainty in the world.

Alex Edwards, Head of Corporate Clients at OFX, said: “Trump is having a long spat with China and he is trying to do everything at his disposal to offset the weakness of the Chinese yuan in the last few months. I can only see the yuan getting weaker if the talks don’t go well.

“Trump has been putting pressure on the Fed to cut interest rates. There is a large difference in interest rates between the US, Australia, New Zealand, Europe and the UK, making the US dollar appear more attractive. “He keeps going on about the Fed needing to do more to cut rates and wants a 0% interest rate as soon as possible. It is not just him that thinks the Fed should move.”

For example, Deutsche Bank has already predicted that the Fed will cut rates four times by the end of this year, said Mr Edwards, which Trump would take credit for.

US dollar note

What this means for businesses trading US dollars

Jake Trask, FX Research Director at OFX explains how this could impact global businesses.

“There is an international bias towards rate cuts on the back of global trade tensions therefore any moves by the Fed may be negated by moves from other central banks. Plus, the dollar will naturally gain strength as riskier assets are sold off. As long as this rumbles on, other currencies may weaken further against the US dollar, with the exception of the traditional super-safe havens the Yen and Swiss Franc. So, if you’re a company selling dollars, you may wish to forward buy Yen and Swiss franc now. If you’re a company buying dollars and selling euro, pounds, Australian or New Zealand dollars, you may wish to forward buy your US dollars now.”

GBP/USD has strengthened from close to 1.2742 on June 23 to reach 1.2038 on August 11 but has fallen back a little to 1.2463 at the time of writing in September. Anyone moving money to or from US dollars needs to keep track of how the US dollar is performing, as it will make a big difference to costs if a large amount of money needs transferring.

For example, based on market rates, converting USD to buy £100,000 could have cost $127,420 on June 23. But less than 2 months later on August 11 buying £100,000 could have cost $120,380 –$7,040 less. For those moving money into US dollars, the stronger the dollar is, the more costly the transaction.

Over the past quarter AUD/USD has fallen on the back of US-China trade concerns. The Aussie is seen by markets as a proxy of Chinese economic health and the slide highlights growing concerns over the state of the world’s second largest economy. AUD/USD was close to 0.71 in mid-July but has since fallen to around the 0.68 handle.

Based on market rates, if you bought USD 100,000 on July 18th it could have cost you AUD 141,203. However, if you had exchanged on August 7th the same amount of US dollars could have cost AUD 149,857 - a difference of AUD 8,654! Just think what that could mean for your business!

US-Iran tensions escalate

Rising tensions with Iran after an attack on Saudi Arabian oil infrastructure, which both President Trump and Saudi Arabia are saying Iran was behind, means there is another potential front that the US could, quite literally, be fighting on. Although in recent days all sides have sought to tone down their rhetoric.

However, despite an armed conflict potentially being on the cards, Hamish Muress, Senior Currency Strategist at OFX doesn’t think this will be something President Trump would encourage even though a war has traditionally been advantageous for sitting Presidents in election years.

Mr Muress said: “It may have been the case 20-30 years ago, but I think the election [in 2020] is key and at the centre of the story. The last thing Donald Trump wants is to be at open war with someone. He is not a Dick Cheney, or Donald Rumsfeld.

“What he does do is he creates an enemy –North Korea, China, Iran, Mexico –and uses them as campaign tools. But he is not going to go to all-out war with them.” Protectionist policies causing real damage at home

For now, the issue affecting US businesses the most is the ongoing protectionist stance of President Trump because of the tariffs paid out by US businesses. It has led to fears of a recession in the US as key indicators, such as an inverted yield curve –when short-dated bonds pay more interest than long-dated ones –have already appeared.

The latest US industry to outline just how much of an impact Mr Trump’s tariffs are having on their bottom line is the outdoor recreation industry, worth around US$412 billion to the US economy each year. It equates to 2.2% of GDP, supports 7.6m US jobs and is responsible for consumer spending of US$887 billion according to reports on CNBC1 based on Outdoor Industry Association figures.

The data shows that from September 2018 to July 2019, outdoor recreation businesses have paid more than US$1.8 billion more in tariffs2 than they did a year ago, and triple what they paid last year.

China-US trade dispute impacts global growth

Senior level trade talks will take place between the two countries in October, and the fate of much more than just America and China rest on their outcome. The trade war has entered its second year3 now and the impact on world markets and currencies has been considerable.

The ramifications have been felt all the way through Asia Pacific, Europe and the UK as President Trump’s actions and unpredictability create ongoing uncertainty. Economies don’t like uncertainty, and while two views make a market, in previous times you would have at least had a chance of determining what the opposing view would be based on past form. Not so with the current White House.

Monetary stimulus to the rescue

However, while there is hope that central banks will increase monetary stimulus –as is already set to happen with the European Central Bank from November –not everyone is convinced this will happen.

Luca Paolini, chief strategist at Pictet Asset Management, said: “We anticipate subdued global growth in the coming months as uncertainty from trade tensions hits industrial production and business sentiment, especially in developed economies.

“Although we expect central banks to ease monetary policy to arrest the economic slowdown, they aren't likely to deliver the volume of stimulus that the markets are hoping for, so we remain underweight equities.” The S&P 500 is a few points away from all-time highs, said Mr Paolini, but the inverted yield curve for US bonds continues to suggest that a recession is on the cards.

What to watch

A further escalation of the trade war would continue to harm the global economy and could have a major impact not just on the US dollar itself, but also other currencies that are closely related to the moves of both the Chinese yuan and the dollar.

The Fed may look to cut rates further later this year if the stalemate continues, but for now the uncertainty continues unabated, and is exacerbated by the current rise in tensions with Iran.

OFX has 20 years’ experience monitoring the impact geo-political events have on currency markets. We have offices around the world allowing businesses to take advantage of our expert local knowledge, coupled with a strong global perspective. With so much unrest globally,markets are moving all of the time. But our experts will watch them for you.

1https://www.cnbc.com/2019/09/13/the-400-billion-outdoor-industry-sounds-alarm-on-trumps-trade-war.html

2https://outdoorindustry.org/press-release/updated-july-figures-show-americas-outdoor-businesses-paid-extra-1-8-billion-tariffs-since-u-s-china-trade-war-began/

3https://www.reuters.com/article/us-usa-trade-china-timeline/timeline-key-dates-in-the-u-s-china-trade-war-idUSKCN1VQ24Y

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