Trade War Truce Impacts Forex Pairs
After months of trading hostilities between the US and China, the two global economic heavyweights finally reached a truce on Saturday. During sideline talks at the G20 Summit, presidents Trump and Xi agreed to suspend the retaliatory tariffs for 90 days to allow for negotiations.
In a press release, the White House stated that the US had managed to coerce China to reduce the trade deficit by buying more US goods and reign in on unscrupulous trade practices.
In return, the US had committed to suspend the tariffs stated for January 1 to facilitate negotiations. The statement stated that the tariffs would be implemented if the two sides failed to reach an agreement.
The Effect On US dollar
Some Experts had predicted that the easing of tension between the two countries would strengthen the dollar and improve the valuation of Asian stocks. However, the immediate effect of the truce has been the weakening of the dollar and the Yen as investors increased appetite for risky assets.
Indeed, it was the volatile currencies such as the Aussie and Kiwi dollar that recorded the most improvements while stable currencies such as the Yen weakened.
The dollar index relative to six major currencies had already fallen by 0.36% to 96.92 by Monday morning. The US dollar lost to the Yuan, the Rand, and the Mexican peso while the Yen hit a new low of 113.85 against the dollar. Meanwhile, the Euro gained 0.3% against the Yen and the dollar to trade at 128.84 and $1.1350 respectively while the Sterling pound gained marginally against the dollar.
Experts attribute the risky trading behaviour to the fact that currency investors no longer see the dollar as a safe bet. Traders now view riskier currencies such as the Kiwi and the Aussie as holding better short-term prospects. They predict that crosses involving the Yen for the Aussie and the Kiwi will record increased activity as traders absorb the implications of the truce. This tread is likely to continue as traders shun the dollar for less liquid currencies that are likely to be stable in the short term.