Currency Chaos Ensues as the Trade War Escalates

Currency markets reacted wildly after Federal Reserve Chairman Jerome Powell calmed investors (https:// www.federalreserve.gov/newsevents/speech/powell20190823a.htm?mod=article_inline) just before U.S.-China trade tensions reached another heightened plateau (https://www.barrons.com/articles/trump-ordered-companies-back-to-u-s-its-not-that- simple-51566578779?mod=hp_LEAD_2). Friday's currency moves again demonstrate that tariffs--the primary weapon in this modern war--are a blunt, somewhat ineffective, instrument.

Maybe market participants should have been ready for volatility because Friday started out chaotically (https:// www.barrons.com/articles/dow-jones-industrial-average-jerome-powell-speech-51566570992?mod=hp_LEAD_1). First, China announced new tariffs on U.S. imports--sending stock markets lower at the open of trading. Stocks clawed back early losses after the Fed hinted more interest rate cuts were likely. The Chinese tariffs, however, prompted an angry reaction from President Trump who, among other things, ordered U.S. companies to come back to America from their overseas production locales.

The U.S. dollar opened higher against a basket of global currencies and then swung to a loss after Powell spoke. The dollar continued tumbling after the Trump tweet, falling about 0.6% from its highs. That may not sound like a huge move, but 0.6% is about three times an average daily move for the dollar against other global currencies.

And still the Chinese yuan continued to weaken against the U.S. dollar Friday, hitting almost 7.1 to the dollar. The Yuan has fallen about 3% to the dollar so far in August. Again, 3% doesn't seem like a lot, but it's about 10 times greater than the average monthly move for the yuan. Breaking through 7 to 1 (https://www.barrons.com/articles/the-dow- tumbles-as-yuan-takes-a-dive-heres-why-51565007196), don't forget, sent the stock market down more than 767 points on August 5.

The trade situation and its tertiary effects are becoming increasingly complex.

Tariffs, for instance, have been the preferred weapon in the China-U.S. trade war, but the currency moves are blunting intended impacts. That's because a weaker yuan makes Chinese imports cheaper for U.S. companies, offsetting some of the impact of threatened tariffs.

Of course, the U.S. dollar is now falling because expectations for lower U.S. interest rates are growing. Lower interest rates make U.S. dollar assets relatively less attractive to other global assets.

With the U.S. dollar and yuan falling, other currencies are gaining. On Friday, the euro is up 0.6% against the U.S. dollar and 0.7% against the Chinese yuan. Europe is trying to stimulate its economy and higher currency values will hurt exports. Germany, for instance, is the second largest exporting economy in the world, exporting more than $1.3 trillion of goods in 2018. Higher euro values could prompt European central bankers to pursue more stimulus.

Predicting what's next isn't easy. Tariffs have increased volatility--in both currency and in stock markets--and that isn't great for anyone.

Write to Al Root at allen.root@dowjones.com (mailto:allen.root@dowjones.com)

-Al Root; 415-439-6400; AskNewswires@dowjones.com


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  08-23-19 1443ET
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