When President Donald Trump announced the prospect of implementing numerous tariffs on Chinese products and China quickly hit back with similar measures, it wasn’t long before the world’s two largest economies were officially embroiled in a trade war.
The effects were swiftly felt as the Chinese job market started to slow down after tariffs and uncertainty created a situation where local companies were reluctant to hire. Additionally, the rate of U.S. imports from China fell 13.9% in the first quarter while Chinese imported goods from the U.S. fell 31.8%.
Yet recently, hopes were revived that the US-China trade war would move one step closer to its conclusion when the two countries agreed to restart trade talks. It even had an immediate effect on the foreign exchange market (forex) as Reuters reported that both the dollar and yuan soared shortly after the move was announced during President Trump and President Xi Jinping’s meeting at the G20 summit. Largely viewed as a sort of ‘truce’ in the trade war, the dollar then saw a jump of about 0.4% against numerous other currencies and offshore yuan grew 0.5%, even hitting a peak of 6.8165 on the dollar, before easing back to 6.8464 after disappointing factory production data.
Wider global effects
This is noteworthy as the forex market refers to the platform where the world’s currencies are traded, with the US dollar and yuan acting as two of the biggest pairings in the market. In fact, it is so vast that FXCM details how the forex market is the largest and most liquid in the world, with average daily trading volume exceeding USD $5 trillion. Given this, it’s no surprise that any moves the two currencies make, will affect other global currencies like the Swiss franc and the Australian dollar, which also felt the effects of a trade war ‘truce’. The former slumped 0.8% against a strengthened dollar while the latter, inextricably linked to the economic situation of its largest trading partner, China, also dropped 0.4% as weaker-than-expected factory data from China was not enough to cover the benefits of the trade ceasefire.
Elsewhere, the Japanese yen also weakened off the back of a strengthened American dollar. The yen, traditionally seen as a ‘safe haven’ currency for investors, dropped 0.6% to 108.53 to the dollar. Similarly, Britain’s sterling dipped roughly 0.4% to hit 1.2638.
Indeed, the rise in value for both America and China’s currencies clearly demonstrates what ending a trade war would do for them. But despite this, President Trump has yet to clearly commit to ending the trade war, only promising that he would ease a few restrictions and hold off on new tariffs in the foreseeable future.
How it’s felt locally
Malta witnessed the effects of this trade war when the euro lost ground against the dollar. Versus the euro, the dollar rose about 0.4% to $1.1328.
Yet, Malta also stands to be affected by the US-China trade war beyond its links to forex. Before the truce, for example, Times Malta’s analysis of the evolving trade war detailed that it would be the country’s manufacturing sector that would be hit hardest. This is because many parts of the manufacturing sector in Malta produce components that rely on demand from abroad. Should the trade war push this demand elsewhere, Malta would do best to prepare for the possibility of an economic recession.
Though it may cause currencies around the world to weaken, ending the US-China trade war will ultimately be a good thing. The world economy needs healthy competition, something trade wars only hinder. In the overall picture, forex is just one of the many components that must be considered.