During the early days of the U.S.-China trade war, President Donald Trump tweeted that “trade wars are good, and easy to win.” Economists and analysts dismissed the assertion as foolish, but it seems that investors have taken President Trump’s remarks more seriously, in a trend that has been bullish for the U.S. dollar – and bearish for everything else.
‘We Have Far More Bullets’
The trade spat between the world’s two largest economies has intensified in recent months without any end in sight. Last week, the White House slapped an additional $200 billion worth of tariffs on Chinese imports, leading Beijing to retaliate with $67 billion in import levies. U.S. officials say they are ready to apply more tariffs, and Chinese officials confirmed they are prepared to respond.
Observers have warned that the trade dispute could linger along this pattern for years.
Jack Ma, one of China’s richest men and founder of the e-commerce juggernaut Alibaba, recently warned at the World Economic Forum (WEF) that the trade war could last for long as 20 years.
President Trump has not been coy about his intentions, telling the world through social media that he will not relent until China stops “ripping us off” – although specifically what he means by this is unclear. Speaking at a packed Missouri rally in support of Republican Senate candidate Josh Hawley, Trump had a message for China: “We have far more bullets.”
Considering the greenback’s trading pattern in 2018, traders who are going long on the dollar might have a message of their own: Mr. President, keep firing those bullets.
Where is the Safe Haven?
When there is market volatility, global uncertainty, or geopolitical tensions, investors typically pour into a traditional asset like gold to shield their capital from trying times. However, in 2018, traders have been treating the greenback, not gold, like a conventional safe-haven asset.
Investors’ contrasting appetites are evident in the direction of the buck and bullion.
Year-to-date, the U.S. dollar has surged as much as 4%, while gold has fallen roughly 10%. The greenback has been outperforming most major currencies, and gold has recorded its worst first-half performance since 2013.
While the trade war has served as a backdrop for the dollar’s ascent, a myriad of developments has lifted the currency. The U.S. gross domestic product (GDP) topped 4% in the second quarter, the national economy keeps posting better-than-expected jobs gains, and annual wage growth touched a nine-year high. As a result, the Federal Reserve is finishing its quantitative easing (QE) program, gradually normalizing interest rates, and unwinding its $4 trillion balance sheet, though Trump has publicly stated that he is unhappy about the Fed’s rate hikes.
Gold is generally sensitive to a rising-rate environment because it lifts the opportunity cost and sends investors into yield-bearing assets, such as Treasuries – the U.S. 10-year Treasury note has topped 3%.
The dollar has pared some of its early gains, tumbling 0.6% in the last month. The run could come to a halt should the central bank pause on rate hikes, or corporate earnings disappoint, but the consensus – for now – is that the bull run still has some legs.
Major Currencies Taking a Nosedive
Aside from the greenback, are any other currencies even remotely attractive? Suffice it to say, 2018 has not been kind to most major currencies, particularly those in the path of President Trump’s trade war.
The yuan has plunged to a 13-month low against its American counterpart, causing the Chinese government and the central bank to reignite their stimulus efforts. Despite the Trump administration accusing China of manipulating the yuan, Beijing has repeatedly stated that it refuses to use the currency as a tool in the trade war – plus, the yuan appreciated in value for several years until its recent decline.
Canada’s dollar has plummeted 3% since the beginning of June. Investors seem doubtful that a new North American Free Trade Agreement (NAFTA) involving Ottawa can be reached. Kevin Hassett, chairman of the White House’s Council of Economic Advisers, revealed that the U.S. and Mexico could go it alone on a new trade pact. This would be a disaster for the Canadian economy since 75% of its exports are sent south of the border.
The Mexican peso was down for much of 2018 until Washington and Mexico announced a bilateral trade deal in late August, helping the peso to rebound 0.5% since. The peso’s long-term direction should be fascinating because the country has elected a socialist, Andrés Manuel López Obrador, to head the government, proposing costly public policies, such as free internet, universal healthcare, and welfare spending hikes.
The European Union started off immune from its trade tiff with the U.S., but it has slipped 0.6% since June. Washington imposed tariffs on EU steel and aluminum exports, prompting Brussels to unleash retaliatory tariffs that target the fragile U.S. agricultural sector.
Japan’s yen has strengthened in the last three months against the greenback, buoyed by positive economic data. However, the yen may experience a reversal at the start of 2019 because President Trump has told a Wall Street Journal columnist that Tokyo might be his next target once “I tell them how much they have to pay.” Moreover, Japan has suffered three major natural disasters recently, destroying infrastructure, transportation links, and property.
With many other currencies making headlines for the wrong reasons, the U.S. dollar appears to be the only certainty in an uncertain international market.
A Winnable Trade War?
Is the dollar’s 2018 rally a sign that the U.S. is winning the trade war? In addition to claiming that a trade war is both good and winnable, the president tweeted in July that “tariffs are the greatest.” But, after several rounds of tit-for-tat retaliation, is anyone winning in this great conflict?
Consider this first: President Trump has been adamant that he opposes a booming buck because he wants to enhance exports. One measure his administration explored was to reverse a 25-year-old strong-dollar policy. So, he might endorse efforts that would threaten the currency’s strength.
Note also another trend: A Trump tweet caused a 25-pip move in the dollar against the yen in a one-hour time span. But, as with Trump himself, his tweets are unpredictable, making it nearly impossible to make reliable predictions about the short-term future.
One moment, Trump is ready to strike a deal, but then he makes a bombastic tweet in the middle of negotiations, leaving trade talks in shambles.
Your gamble on the buck, and perhaps the global trade spat, is in Trump’s tweets. As the saying goes, when the U.S. sneezes, the rest of the world catches a cold. Or, in this case, when Trump tweets, the rest of the world’s timeline is flooded with replies, retweets, and likes.
Do you think the dollar can continue to post gains? Let us know in the comments section!
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