Economy

Has the global trade war morphed into a currency war?

US dollar against Latin American currencies

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  • Amid the new battle between the United States and China, countries are racing to drop their currencies lower than competitors, so as to gain an advantage in trade;
  • This runs counter to how the relationship between countries is supposed to take place, as the main goal should be achieving a balanced economy;
  • In general, experts warn that the continuity of a trade war based on currency war is potentially dangerous for everyone, especially emerging market.

Amid the new battle between the United States and China, the trade war seems to have transformed into a currency war in the last few days. Countries are racing to drop their currencies lower than competitors, so as to gain an advantage in trade. 

According to Markets Insider, this runs counter to how the relationship between countries is supposed to take place, as the main goal should be achieving a balanced economy. And this shift has been worrying financial experts. The Cboe Volatility Index, or VIX, commonly known as the stock market’s fear gauge, jumped 32% in a single day this Wednesday. 

Analysts are still evaluating China’s move on Monday to let the nation’s currency fall past the key level of 7-yuan-per-dollar for the first time in over a decade. The sharp drop in the Chinese currency came after US President Donald Trump announced a fare increase of 10% for the remaining $300 billion of Chinese imports starting September 1st.

The Brazilian currency BRL also dropped to its lowest value in over two months, to 3.96 BRL against the US dollar, this Wednesday. Neither the approval of the Social Security Reform in the second round, nor the sale of foreign exchange swaps by the Brazilian Central Bank softened the BRL’s decline against the US dollar.

Juan Prada, a Barclays strategist, said to Reuters that Brazil is on the right track, but that political uncertainties and critical economic indicators such as unemployment still pose a risk to the country’s economy. 

In Mexico, the peso has been lumped together with other emerging market currencies and has fallen, along with the Chinese yuan. The Mexican currency is on its way to a higher range between 19.50 and 19.75 for each US dollar.

Mexico’s vulnerability is due to “rising idiosyncratic risks,” Natalie Rivett, senior emerging market analyst at Informa Global Markets, said to Reuters. According to her, president Andrés Manuel López Obrador’s administration “has lacked the delivery of reforms intended to attract investment and boost productivity,” she added to Reuters.

Also this week, Colombia’s currency devalued on Monday to an all-time low against the US dollar, reaching 3.480 Colombian pesos (COP) to each US dollar – becoming the region’s weakest currency.

According to the portal QCostaRica, “in February, the dollar reached 3.379 COP, but this record low dropped yet again, and the Colombian currency lost about 12.5% after the Central Bank said it would stop purchasing the U.S. currency.”

In general, experts warn that the continuity of a trade war based on currency war is potentially dangerous for everyone, especially emerging market. In the Brazilian case, even if there is a gain in commodity exports, the cost that a high appreciation of the US dollar brings with it, such as the pressure on the cost of credit and acquisition of goods for companies, is not positive in the long run.