Arthur J. Villasanta – Fourth Estate Contributor
Washington, DC, United States (4E) – The world has been so focused on Donald Trump’s destructive trade war it’s failed to notice that another war has crept up on it: a currency war between China and the United States.
That war took center stage when president Donald Trump a week ago accused China and the European Union (EU) of “manipulating their currencies and interest rates lower” but without offering proof.
Trump’s timing of his tweet wasn’t by accident — it came on the same day (July 20) that the yuan plunged to its lowest level in a year, with scant evidence the People’s Bank of China (PBOC), the central bank, intervened to stop the rot.
A week later, or on July 27, the International Monetary Fund (IMF) warned China it must resist taking aggressive stimulus steps while navigates troubled economic waters. These steps might add to excessive debt levels leading to an “abrupt adjustment.”
The IMF warning came after Chinese leaders early last week signalled a shift toward looser fiscal policy to help protect China’s economy against global economic turbulence being stoked by a trade war with the United States.
After more than a year of aggressively cracking down on dangerously high debt levels, China’s cabinet on July 23 said it would be more “active” in stimulating the economy, citing “external uncertainties.” The yuan is the most effective weapon to battle external uncertainties.
“The real risk is that we have broad-based unravelling of global trade and currency cooperation, and that is not going to be pretty,” said Jens Nordvig, founder of Exante Data LLC, a data analytics firm. He noted that Trump’s recent rhetoric “is certainly shifting this from a trade war to a currency war.”
This war will likely be worsened this week if PBOC does nothing to stem the downward spiral of the yuan that reached a new low on July 20. PBOC made no move on this day to stop the steady depreciation of the yuan against the U.S. dollar in an apparent move to help Chinese exporters better withstand ongoing U.S. tariff hikes.
The yuan (RMB) skidded to a 12-month low of 6.8 to the dollar on July 20, 7.6 percent lower compared to mid-February. Financial analysts discounted trade tensions as the main factor, and instead said the drop was mostly caused by China’s decelerating economic growth.
At the end of the trading day, however, the yuan reversed its early and stood at 6.7790 per dollar at 5:36 p.m. in Shanghai after falling as much as 0.5 percent to a new one-year low.
Whether the PBOC attempts to peg the yuan-dollar exchange rate near 6.80 to avoid further escalation is key, said Nordvig. He believes European Central Bank (ECB) president Mario Draghi might elect to enter the fray at the ECB’s July 26 policy meeting after American attempts to talk the dollar down in January were slammed in Frankfurt.
Article – All Rights Reserved.
Provided by FeedSyndicate