On Thursday, President Donald Trump said he would charge a 10 percent tariff on $300 billion in Chinese goods, ending a period of seemingly eased tensions between the two countries.
China promised to fight back.
On Monday, the Chinese government let its currency fall below the symbolically significant seven-per-dollar level, an apparent retaliation that moves trade tensions into another arena. This is the first time the Chinese currency breached the seven-per-dollar level since 2008, CNBC reported.
The U.S. Treasury said China is deliberately influencing the exchange rate between the yuan and the U.S. dollar to gain unfair competitive advantage in international trade.
The U.S. accused China of being a currency manipulator. China’s central bank rejected the label, saying it was the accusation that’s to blame for “seriously” undermining the international financial order and risking further market turmoil.
The S&P is down 5.8 percent in the last week and 10-year Treasury bonds yielded 1.72 percent at Monday’s close, down from 2.06 percent a week earlier, a sign that investors now think weaker growth and additional interest rate cuts by the Federal Reserve are imminent, New York Times reported.
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A slightly cheaper Chinese currency shouldn’t have huge consequences for the global economy, Neil Irwin reported for NYT. Rather, investors are dealing with the reality that the trade war is spreading into the global currency market.
“To depreciate the currency at such a fraught time sends a signal that they are prepared to endure a heck of a lot of pain, and it doesn’t surprise me that markets would finally come around and say, ‘This could be really bad,’” said Paul Blustein, a senior fellow at the Centre for International Governance Innovation and the author of “Schism,” a book due out next month about the fraying relationship between the U.S. and China.
This could be a major turning point for the global economy or just one rough day on the markets, Irwin reported. However, it is clear that the trade war is no longer confined to trade.
The risk is that Trump and leaders of other countries will consider currencies fair game as a weapon in trade disputes. Trade and currency disputes have historically gone hand-in-hand, as happened in the Great Depression when countries competed to devalue their currency.
Germany, China, Brazil and others accused the U.S. of manipulating its currency when the Fed engaged in “quantitative easing” (money printing) in 2010 that depressed the value of the dollar.
China accused the U.S. of being irrational, according to a statement by the People’s Bank of China. “The Chinese side advises the U.S. to leap over the cliffs and return to the correct track of rationality.”
Since the trade war started in 2018, the U.S. has imposed 25 percent tariffs on $250 billion worth of U.S. imports from China. China retaliated by taxing billions of dollars of U.S. products that it buys.
In recent months, tensions between the two countries have gone beyond trade into technology and security. The U.S. blacklisted Huawei, making it more difficult for the Chinese tech giant to do business with U.S. companies.