The Trade war has the tension between the US and China mounting. As a result, the currency market is getting a bit more tenuous. This is where strategy comes into place for the currencies against the dollar. Recently, President Trump has increase tariffs on imports coming from China to as high as 25%. A significant amount, considering that the yuan will have lose 8.12 for every dollar just to compensate.
Despite the animosity surrounding the countries, they are not using their currencies as weapons. Instead they are using their currencies as a defensive stance against the dollar. Instead of going on the offensive, some countries are more bent on controlling the escape of their currencies than just encouraging natural growth.
Countries Taking a Cautious Stance
Some of the countries’ central banks that have gone towards this cautious strategy include Asian powerhouses like South Korea and Indonesia but more importantly China. The concentration is more toward convincing people to keep the money in instead of devaluation to boost economies.
With the Yuan cheapening because of the trade war, Options are now pricing at a 36% chance that it will be trading weaker below 7 per dollar. This is a significant development as it was a 15% probability just this March. The depreciation will only add to the tensions between the US and China.
Trade War Pushing The Dollar Up
The trade war is strengthening the dollar and in the process weaken some emerging markets of their foreign reserves. The strength of the dollar would push investors to put their money into treasuries. At the end of the day, the trade war would leave the dollar stronger.
Trade War Leaves Emerging Markets Weaker
Almost all the emerging markets have weakened against the dollar. The Yuan lost 2.7% in trading today. Both the South Korean Won and the Indonesian Rupuiah hit lows. As a result of this Seoul has called for an emergency meeting and Indonesia has been making interventions as of late.