US Dollar Outlook Bullish On Future US-China Tension

The US Dollar may catch a haven bid as US-China tensions gradually escalate amid widening disagreements on foreign policy. Political volatility may dampen risk appetite and put a premium on liquidity. Issues over trade, the South China Sea, and Taiwan remain the biggest sticking points, with the latter drawing more attention following America’s pullout of Afghanistan.

Sino-US tensions were expected to remain high even after former President Donald Trump left office. This is in part due to the structural changes China is implementing as part of its long-term strategy to eclipse the US as a global hegemon by 2049. These competing priorities - and with so much at stake - will likely result in political disputes that will spark market volatility.

CHINA’S CONFRONTATIONAL APPROACH

Deng Xiaoping was famous not only for economically liberalizing China but also for putting into policy the notion of “[hiding] your strength and [biding] your time”. The current president, Xi Jinping, has taken a diametrically opposite approach with the cultivation of nationalism and the complementary use of so-called Wolf Warrior-style diplomacy.

The latter is characterized as being far more confrontational and unyielding, something the new ambassador to the United States, Qin Gang, illustrated in a speech earlier this month. While he mentioned areas of cooperation such as climate change, friction over Taiwan, and calls for investigations into the origins of COVID-19 are overshadowing these more constructive efforts.

While the coronavirus continues to remain the biggest fundamental risk, politics may soon take the spotlight for investors. A sudden flare-up and sustained escalation on this front could put markets on the backfoot and push the haven-linked US Dollar higher at the expense of Asia-based emerging-market assets.

BELT AND ROAD INITIATIVE (BRI)

China’s Belt and Road Initiative (RBI) is a long-term, economic-based foreign policy framework meant to weave economies together in a web with China at the center. It is an extension of the East Asian giant’s broader strategy of regional fortification as a mechanism to insulate itself against any blowback its actions domestically or abroad may elicit from the international community.

1 2 3
View single page >> |

Disclaimer: See the full disclosure for DailyFX here.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.