The US Dollar Comes Back Bid After Being Squeezed Yesterday

Sometimes it is hard to distinguish between cause and effect, but the net result is that tensions over Taiwan seem to be rising. On the one hand, China appears to have become more assertive in general. There have been clashes with India, a new 25-year agreement with Iran, retaliatory sanctions against US, Canadian, UK, and EU officials for initiating sanctions over the treatment of Uighurs, and maritime shows of force in disputed waters. Beijing has continually harassed Taiwan by sending fighter planes and other aircraft into Taiwanese territory. Eight fighter planes were sent yesterday alongside two other military aircraft. In late March, Beijing sent 20 warplanes in a single day. It could have looked like an invasion.  

The narrative in the financial press often does not see the provocative role of America itself. Consider the case of the missing semiconductor chips. The shortage of semiconductors has been exacerbated by US sanctions against the largest consumer of chips in China (Huawei), forcing it to scramble to re-source and China's largest producer of semiconductor chips (SMIC), but one is rarely presented with the linkages. Similarly, it is not coincidental that China's show of force happened a day after the US and Taiwan agreed to boost cooperation between their coast guards. Right from the start, with the planned call with Taiwan shortly after the 2016 election, the Trump administration moved to weaken the taboos governing the formal US-Taiwan relationship. In its waning days, many of the curbs that had been in place were rescinded, and the Biden administration is extending the departure from the traditional approach. According to press reports, Secretary of State Blinken has referred to Taiwan as a country. Beijing seems just as worried about the US and its allies trying to alter the status quo as American officials are concerned that Xi will move. The high degree of mistrust makes the situation particularly tense. Meanwhile, China has sent dozen of "fishing boats" to the Whitsun Reef, claimed by the Philippines, and have kept them there were a few days now, seemingly testing and probing the US resolve.  

The dollar is trading quietly against the yen. It briefly traded below JPY110 yesterday for the first time in a week but has remained above it today. There has been no follow-through selling after yesterday's outside down day. Resistance is seen in the JPY110.50-JPY110.75, though last week approached JPY111.00. The Australian dollar posted an outside up day yesterday, but there also has been no follow-through buying. While the $0.7660 area caps, pressure is on the downside. The $0.7620 area offers initial support, and a break could see $0.7585. The US dollar fell by about 0.25% against the Chinese yuan, which is a relatively large move. Last month, the dollar fell by more on only two occasions. The Caixin services and composite PMI rose more than expected, lending credence to ideas that the composition of activity is changing in favor of a little more demand. The PBOC set the dollar's reference rate at CNY6.5527, a little firmer than expectations.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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