The US have softened their approach towards China recently, with The Office of the US Trade Representative removing products from its list of Chinese exports due a 10% tariff in September. In addition, some remaining goods will be delayed until December.
This change in approach has seen the USD strengthen against most currencies and stocks in the US rise. The US-China trade war has arguable affected economies elsewhere more than their own.
The apparent step back from the brink of another escalation in the trade dispute between the world's two largest economies went down well in financial markets, prompting a recovery of the dollar relative to so-called safe-havens like the Japanese yen and Swiss franc. Riskier currencies like the Aussie and New Zealand also recovered some of their recent losses.
Analysts at Westpac, have forecast the pound will hit a new post-referendum low against the USD over the coming months even if parliament is successful in preventing a no-deal Brexit. The USD could be set to remain strong and is seen as one of the best performing developed market amid global uncertainty.
As trade tensions escalate, there may be more aggressive interest rate cuts from the Federal Reserve. CNBC have reported that economists now see a three quarter-point reduction in US interest rates by the end of the year and multiple reductions in 2020.
UBS economist Seth Carpenter said in a report for clients. “Although we saw little support from the [Federal Open Market] Committee for further cuts at the July meeting, trade developments should provide enough justification to cut in” September. Historically, when there is an interest rate cut, we see weakness on the currency in question.
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