Currency war is more dangerous than trade warby Ivan Tong
As the yuan continues to fall, US President Donald Trump has now begun to accuse China of manipulating its currency to boost its export competitiveness.
Although the currency war comes after the trade war, if the trend continues, it will turn into a "which came first, the chicken or the egg?" conundrum.
The US will find a currency war more difficult to win than a trade war.
If a country is identified as a currency manipulator, the US can use Section 301 of the US Trade Act of 1974 to impose punitive tariffs on the offending country. In another words, the weapon that the US has in a currency war is a trade war. Thus, the trade and currency war will meld into one war.
Donald Trump is an extraordinary president. He has criticized the Federal Reserve's rate hikes, which were made on the back of a better economy, breaking the golden rule that a president should never intervene in Fed policy.
I'll eat my hat if Trump's words did not impinge on the Fed's independence!
By blasting the Fed's rate hike, raising new threats to slap tariffs on US$500 billion worth of Chinese goods and accusing China of manipulating its currency, Trump has fired three missiles in China's direction.
Beijing certainly will not acknowledge that China has taken advantage of a weaker yuan to increase its export competitiveness and counter punitive tariffs slapped by the US.
However, the yuan's fall started in the second quarter of this year. Last week, it fell to 6.814 against the US dollar, down 8 percent compared to the first quarter. This fall is close to the 10-percent tariff rate slapped on China in the second round of the trade war.
More importantly, the amplitude of the yuan is much greater than that of the US dollar index.
In terms of trade volumes, China is weaker than the US and does not have enough gunpowder in its armory. This is why China emphasized it would make use of both quantitative and qualitative measures in its toolbox to fight the trade war.
China's intervention in the currency rate may be subtle, and it would be silly if Beijing did not hit the US behind its back.
Annoyed by this, Trump is trying to lower the US dollar for exports, and lambasting the Fed over expected US rate hikes. If these measures fail, with midterm elections round the corner, Trump may go for a fresh currency war.
Once a currency war breaks out, global markets will become more volatile. Stock markets, currency markets and even fixed-asset markets would suffer.
Trump should take a hard look in the mirror before pointing fingers. On the one hand, he's accusing China of currency manipulation but on the other, he's berating the Fed, to slow down its rate hikes. His aim is to influence currency rates.
However, Trump should know the US does not have any weapon that's as efficient as China's in a currency war.
China already has regulations on foreign exchange control to restrict capital outflows. Unless the US's economy declines or the trade war spirals out of control and pushes the US dollar lower, any export strategy gains would only be temporary.
This week, the US dollar index may claw back, while the yuan should get some breathing space to recover after a sharp drop. The Hang Seng Index may also bounce back.
However, since the trade war has entered a new level, the currency markets will be more volatile. Its not just the yuan at risk, as other currencies too may experience wild fluctuations. It may be a good opportunity for speculators but harmful to long-term investors.
Source: The Standard HK
http://www.thestandard.com.hk/section-n ... 0723&sid=2
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