The US dollar stood last, but for one, in the list of weakest currencies during the latest trading week mainly due to the heightening tension surrounding the trade war between the US and China. While the greenback typically strengthens in risk aversion scenarios, that was not the situation this time. Obviously, Brexit uncertainty keeps the pound as the weakest currency among the currencies of G10 economies.
Earlier in May, trade conflicts between Washington and Beijing intensified significantly after the Trump administration blamed China of “reneging” on its prior commitments to make fundamental adjustments to its economic activities. Washington subsequently imposed extra duties of up to 25% on $200 billion worth of Chinese products, causing Beijing to strike back.
The trade conflict intensified following a ban on the use of Google tools by Chinese smartphone manufacturer Huawei. President Donald Trump stated Thursday that US allegations against Huawei Technologies Co Ltd could be addressed under a US-China trade agreement while naming the Chinese telecom company “very dangerous.”
Regarding Huawei and trade negotiations, Trump said: “You look at what they’ve done from a security standpoint, from a military standpoint, it’s very dangerous. If we made a deal, I could imagine Huawei being possibly included in some form or some part of it.”
The US called on China to limit the growth of its state-owned businesses (SOEs), a requirement that China considers as an “invasion” on its financial independence, as stated in the Saturday Chinese government media newspaper Xinhua. China denied that it had gone back on its commitments, but repeated that it would not concede on “matters of principles,” and defend its key interests, even though complete details were not offered.
The fresh wave of demands from the US has irritated China considerably. Chinese state news agency Xinhua said, “At the negotiating table, the U.S. government presented a number of arrogant demands to China, including restricting the development of state-owned enterprises.”
The subsequent risk aversion sentiment caused the Treasury returns to fall, which resulted in the greenback’s decline. However, some industry experts asserted that the fall was not that large, which means that markets are yet to price the worst.
This implies there’s space for the dollar to drop further. Several analysts, once hopeful for a trade agreement between the US and China, are now skeptical about a solution in the near future. Some analysts believe that the two largest countries in the world are moving into an economic cold war that might last for years.
In a note to clients, Carl Weinberg, the chief economist at High Frequency Economics, said: “We now take it as our base case that the ‘deal’ to end the trade war, which many market participants were sure was forthcoming just a few weeks ago, is now the tail risk.”
Weinberg further stated that what seemed to be an unlikely event a few weeks ago, has suddenly turned probable. The prevailing geo-political situation is expected to keep the greenback weak in the near-term.
Technically, the EUR/USD has broken the resistance at 1.1160 level. The currency pair is trading above the 50-day moving average. Furthermore, the stochastic indicator is in the bullish zone. As a result, we can expect the currency pair to rally in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
