Here’s Why A U.S. Initiated Trade War Is Helping The U.S. Dollar

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The US dollar has hit 12-month highs against other major currencies after U.S. President Donald Trump has threatened China, Europe and Canada with hefty tariffs on imported goods.

There’s no doubt that everyone is concerned by the trade war. In the long run, a trade war reduces demand for US products and in turn weighs on the US dollar. It also makes the greenback less desirable as a reserve currency. If lower trade drags down US GDP growth, it could mean less tightening by the Federal Reserve. None of this is positive for the USD, and yet the greenback is soaring on the recently imposed US tariffs, even as plans of retaliation from other nations begin to form! As 2018’s Q2 nears an end, it’s now evident that the US’ trade war has somehow managed to bolster the U.S. dollar to yearly highs!

Although many people feared that a trade war would exacerbate the dollar’s troubles and reduce demand for the greenback, it instead sent the dollar soaring. Indicatively, the recently imposed US tariffs on China reversed the dollar’s post-FOMC June slide and sent the euro tumbling 2.5 cents in one day! In fact, because of the dollar’s unprecedented rally, the euro and Australian dollars were last week’s worst-performing currencies.

But how can the onset of a trade war actually benefit the USD? It appears that the markets are interpreting Trump’s aggressive trade actions as short-term trouble for countries he’s singling out. The reason why the dollar is behaving this way is because while a trade war is bad news for everyone, it is even worse for the countries being singled out as many of them rely heavily on US demand. The US could survive by selling fewer goods abroad but other countries could suffer greatly.

As China threatens with retaliation by imposing tariffs on U.S. imported crude however, things could take a drastic turn for the worse. The European Union also endorsed a plan for tariffs on US products that will be implemented in late June, early July. All of this means that currencies will be particularly sensitive to headline risk this week.

Source: Investing, Jun 18, 2018 02:01AM ET

*Please note that this article is not meant to be construed as investment advice or suggestion of an investment strategy with respect to any financial instrument.

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