The US dollar has strengthened after the escalation in the US China trade war after Donald Trump increased tariffs on $200 billion of Chinese imports heading for the US. Although Donald Trump has more recently tweeted that “trade talks are going to be very successful” he doesn’t confirm who for.
|Currency Pair||% Change (Month)||Difference on £200,000|
Since the Chinese imposed their own tariffs this week the US has been quick to threaten even more tariffs on a further $300 billion of imports coming from China. The US dollar is likely to react strongly to any further developments in this ongoing trade war. Any agreement on trade could actually result in dollar weakness as investors prepare to move away from the safety of the US dollar.
It has been confirmed that the next meeting between Xi Jinping and President Trump will be held June 28th/29th at the G20 Summit in Osaka. Chinese goods that have been targeted with tariffs last Friday take a month before they arrive on US soil. It leaves a window of opportunity for a deal to be reached meaning these tariffs don’t have to be necessarily enforced. It also signals a volatile period ahead for dollar exchange rates whilst the markets try to evaluate the progress of these trade talks.
It is widely acknowledged that the US Fed will now seek to pause its interest rate tightening cycle for the foreseeable future. The Fed raised interest rates four times last year but are now waiting for inflation to rise higher after it has remained persistently low. If it doesn’t rise higher then there is even the possibility of interest rate cuts, something that the President would like to see.
The US China trade war however could have some influence on the Fed’s future policy. Donald Trump has indicated that China will now look to use quantitative easing or similar “printing money” measures to try and offset the tariffs. The President has even also called upon the Fed to match any measures from China.
His tweet yesterday read, “China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a match it would be game over, we win! In any event China wants a deal!” Any change of policy from the Fed in this way is likely to see further market reaction for dollar exchange rates.
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