How The "Currency Cold War" Between The US And China Could Heat Up

Unlike a traditional war with clear battles, a cold war is fought covertly and indirectly. When it comes to currencies, any attempts to weaken the domestic currency must, at least publicly, have different motives and  plausible deniability, so that government cannot be accused of escalating the conflict. Much like THE Cold War of the late 20th century, the primary conflict in the budding Currency Cold War centers around two superpowers: in this case, the US and China.

For its part, the new Trump Administration is coming out swinging. On the campaign trail, Trump previously vowed to label China a currency manipulator on "Day One", but he's since backed off slightly, though the issue still makes his list of priorities for the first 100 days. Though the US has refrained from taking that official step as of writing, he and his surrogates continue to make vague threats about leveling the global FX playing field.

China, while relatively new on the global economic stage, has plenty of experience in political cold wars, as its enforcement of the so-called "One-China" policy and the ongoing dispute over various islands in the China Sea exemplifies. Indeed, as the chart below shows, China has successfully toed a difficult line thus far this year, allowing its currency to depreciate against most of its major rivals while holding steady against the US dollar.

Source: TradingView.com

What few casual observers realize is that China has been intervening in the currency market to "manipulate" the yuan's value, but that the country has actually been propping up the value of its currency rather than devaluing it. If the US opts to label China a currency manipulator in the coming months, the People's Bank of China would have less incentive to spend this money to support its currency and the yuan's depreciation could accelerate.

To return to the original cold war analogy, the decision to label China a currency manipulator is hardly the "nuclear option." Even if the US Treasury officially dubs China a currency manipulator, the two countries must spend a year trying to resolve the conflict via negotiations before the US can take enact token trade sanctions.

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Bill Myers 4 years ago Member's comment

Enjoyed this article, thanks. Looking forward to more by you.

Matt Weller 4 years ago Author's comment

Thanks Bill!

Bill Johnson 4 years ago Member's comment

Very well done. You've summed up a complex issue rather well. I believe #Trump wouldn't think twice about direct protectionism. He seems to have no qualms about instituting punitive tariffs on #China.

Alexis Renault 4 years ago Member's comment

Can #Trump unilaterally enact a #tariff on his own?