President Trump has threatened new tariffs on Chinese imports, causing money market fluctuations
Latest insights:
Investors braced for market turmoil at the end of last week as President Trump threatened 100% tariffs on Chinese imports and Beijing responded with threats of its own. Trump’s new salvo in the long-standing trade war came in response to what he called “very hostile” moves by China to restrict the export of rare-earth minerals.
The immediate result was a boost for the euro against the dollar. The EU currency quickly recovered from a two-month low prompted by political turmoil in France. Overall, the euro has now strengthened by over 6% against the dollar over the last 12 months.
The pound also climbed against the dollar, after falling to a 10-week low earlier in the week. However, concerns over the impact of the UK’s November budget saw the pound lose further ground against the euro, down 0.69% in the last month.
Is Trump serious?
Slapping 100% tariffs on Chinese imports would undoubtedly risk a serious trade war. It’s the kind of scenario investors had thought the countries had put behind them when they agreed a trade framework in the Summer. The big question now is whether Trump is serious, or the threat is just another negotiating strategy.
Whichever it turns out to be, the problem with this approach is that it breeds uncertainty, and uncertainty is contagious. It infects business confidence and it spreads to markets. Exchange rate volatility is more likely in times of tariff uncertainty.
Coming up:
With that in mind, investors will focus on tariffs this week, and hints that Washington does or does not intend to push ahead with the 100% threat. China’s reaction – muted so far – will also be monitored.
Important data released this week include UK unemployment rates (Monday) and GDP (Thursday), and the ZEW Economic Sentiment Index in Germany (Tuesday). Some key US metrics will again be delayed by the government shutdown, now entering its third week.
