The 36 hours since the FOMC meeting on Wednesday evening have certainly been quite lively. The initial reaction to the rate hike, Statement and Press Conference was to buy stocks and sell the Dollar. The USD index against a basket of major currencies fell from 89.80 to 89.20 and extended its losses to a low on Thursday morning of 89.00. Yesterday was a very bad day for the stock market, especially in the last couple of hours of trade, but as the DJIA was down 700 points by the close, the USD recovered to 89.50. Overnight in Asia, both stocks and the dollar are lower once more, albeit the USD index at 89.15 is still for the moment holding above its previous low.
The US stock market took fright at the prospect of higher tariffs on Chinese exports which were announced at 1.30pm local time in Washington. In a Memorandum the President has directed his Administration “to take a range of actions responding to China’s acts, policies, and practices involving the unfair and harmful acquisition of U.S. technology.” According to a Reuters report, “Trump will target the Chinese imports only after a consultation period, a measure that will give industry lobbyists and legislators a chance to water down a proposed target list which runs to 1,300 products. China will also have space to respond to Trump’s actions, reducing the risk of immediate dramatic retaliation from Beijing, and Trump struck an emollient tone as he started speaking, saying “I view them as a friend.” The United States runs a $375 billion goods trade deficit with China.
As for next steps, the U.S. Trade Representative’s office will present a list of products that could be targeted, primarily from the high-tech sector. There will then be a 60-day consultation period before definitive action will be put into force. The tariffs and investment restrictions will be imposed under the U.S. Trade Representative’s “Section 301” investigation into alleged misappropriation of U.S. intellectual property by China. The Chinese Trade Ministry responded overnight with a statement saying, the higher US tariffs “seriously undermine” the global trading system. “China doesn’t hope to be in a trade war, but is not afraid of engaging in one… China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.” Against this very difficult economic and diplomatic background, the USD index opens in Europe this morning at 89.15.