Trade tensions are entering a new phase. The U.S. has accused China of mobilizing its currency, the yuan, to gain the upper hand in trade. The threat of currency wars isn’t novel, but who will win out?
Share to twitterTraders work at the New York Stock Exchange on August 5, 2019 at Wall Street in New York City. - Selling on Wall Street accelerated early Monday as a steep drop in the Chinese yuan escalated the US-China trade war following President Trump'sTrade tensions are entering a new phase. The U.S. has accused China of mobilizing its currency, the yuan, to gain the upper hand in trade. The threat of currency wars isn’t novel.
Ironically, while the U.S. fears that China is undervaluing its currency, the hard data suggests it has been propping it up over the last several years. As China looks to rebalance its economy from manufacturing to services, it has focused on improving consumer buying power through wage increases and a bias towards a strong currency.
The other winner is the U.S. dollar. The dollar tends to be a counter-cyclical currency. If growth in the rest of the world is accelerating relative to the U.S., the dollar tends to dip. However, if the U.S. economy leads, then the dollar strengthens - just as we see today. Recent data shows a broad-based slowdown in housing. And with a government that’s unlikely to stimulate the real estate sector, this leaves few supports for property companies struggling with a heavy debt burden. Given a depreciating currency, defaults could quickly accelerate. Regardless of the immediate winners or losers, in the long run, currency wars are zero sum games. U.S.
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