Trade conflict risks igniting currency war

China’s currency fell to an 11-year low against the US dollar, prompting US authorities to brand the country a currency manipulator.

"Every now and then, August belies its reputation as a sleepy month," saysLarry Elliott in The Guardian. Last week, China's currency (the yuan, or renminbi) fell to an 11-year low against the US dollar, tumbling through the level of seven-to-the-dollar, previously regarded as a "line in the sand". That prompted US authorities to brand the country a "currency manipulator" for the first time since 1994.

There is now talk of a "currency war", says Jill Treanor on BBC News whereby nations competitively devalue their currencies to boost exports. There are signs that this game of "beggar-thy-neighbour" has already begun. Last week brought interest-rate cuts from central banks in New Zealand, Thailand and India (see opposite). Cuts tend to weaken currencies because they prompt investors to look elsewhere for a better return.

Currency contagion and the 1930s

It's certainly another headache for investors, says Mark Atherton inThe Times. Renminbi weakness carries the risk of a "deflationary shock being sent around the world as markets are flooded with cheap Chinese goods". The worsening trade dispute is also likely to spell trouble for big US brands such as Apple and Walmart. "China's billion-strong army of consumers can make or break any foreign brand selling in their country."

The yuan's fall has "revived memories" of August 2015, when a surprise mini-devaluation panicked markets, saysSteven Russolillo in The Wall Street Journal. "Hundreds of billions of dollars" left China in the aftermath as citizens and companies moved funds offshore.

The trade war is getting uglier

That said, fear of renewed capital flight is likely to prevent China from pursuing a bigger fall in the yuan, notes Russolillo. "Any further sell off could also create problems for Chinese property developers" and conglomerates, which have loaded up on overseas debt, but must pay it back with yuan-based earnings.

A disorderly rout is unlikely, agrees Arthur Kroeber of Gavekal Research. "At the risk of splitting hairs," recent weakness should be seen as a depreciation rather than a devaluation, driven by genuine market forces rather than official fiat. Nevertheless, the risk is that, despite this week's tariff reprieve, "the US and China are close to throwing in the towel on a trade deal".

Recommended

Digital pound likely to launch this decade
Currencies

Digital pound likely to launch this decade

The Treasury and the Bank of England have launched a consultation on the introduction of a state-backed digital pound. We explain how a “Britcoin” cou…
7 Feb 2023
10 outrageous predictions for 2023
Investments

10 outrageous predictions for 2023

Dominic Frisby takes a look at ten outrageous predictions for 2023, including the forecast that the price of gold could surge as high as $3,000 over t…
14 Dec 2022
Gold or bitcoin: what will replace the US dollar?
Bitcoin & crypto

Gold or bitcoin: what will replace the US dollar?

As Russia and the West move further apart, there’s a growing need for a new global reserve currency. The US dollar could soon be replaced by gold or b…
6 Dec 2022
What is FX trading?
Currencies

What is FX trading?

What is FX trading and can you make money from it? Rupert Hargreaves explains how it works and the risks.
25 Nov 2022

Most Popular

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023
Government plans could see NS&I boost interest rates
Savings

Government plans could see NS&I boost interest rates

The government-backed bank has a new funding target, which could prompt it to boost the rates on its Premium Bonds, ISAs and bonds.
16 Mar 2023
Where will house prices go in 2023?
House prices

Where will house prices go in 2023?

We explore what could happen to house prices in 2023 as the market continues to slow down.
24 Mar 2023