Trade tensions between the US and China are starting to pull foreign-exchange markets into the arena. Yet far from embracing their currencies as a weapon, many countries are being forced to take a defensive posture against the almighty dollar.
Central banks seem more intent on keeping their currencies steady and stopping money from escaping rather than engaging in devaluations to boost their competitiveness in trade. Officials in China, South Korea and Indonesia on Wednesday were among those taking steps to buoy their currencies as the prospect of more rapid depreciation raised the specter of capital outflows.
In the meantime, the standoff between the world’s two largest economies is pushing uneasy investors into the greenback and US policy makers may face problems if the stronger dollar -- which is currently near its highs for the year -- is seen as crimping their efforts to promote higher inflation.
The forces roiling currencies are magnifying the focus on China and how it will handle a cheapening yuan. Options traders are pricing in around a 35% chance that the renminbi will by year-end weaken past 7 per dollar -- a level unseen since the financial crisis. At the end of March, the probability was just 15%. That kind of depreciation would threaten to heighten tensions with the US and potentially drive emerging-market currencies broadly lower.
“The outcome of the trade war should be to bid the dollar, drain emerging-market foreign reserves,” and push investors into Treasuries, said Sebastien Galy, senior macro strategist at Nordea Investment Funds. “At the end of the day, there is only one winner, the dollar.”
Markets have been buffeted by uncertainty as the trade impasse shows no sign of abating...Read More
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