The US dollar declined against its major rivals on Friday after President Donald Trump increased tariffs on about $200 billion worth of Chinese goods to 25% from 10%. Yesterday, the downward trend continued in hopes of a Fed rate cut.
The downward trend was also aided by reports of China announcing retaliation plans. Specifically, the greenback fell sharply against the safe-haven currency, the yen, as investors ran for cover. From a high of 109.80, the USD/JPY pair tumbled to a low of 108.95.
Trump attempted to continue pressuring China to achieve a trade accord in a string of Twitter messages, warning the communist nation that the final trade agreement will become “far worse for them if it has to be negotiated in my second term.”
Trump tweeted: “I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, & you backed out!”
The sudden turn of events in the past few days has seen the market participants rethink the likely future interest rate decision by the US Fed.
Market participants presently anticipate a 25 basis points rate cut by December. The Fed’s short-term rates currently stand in the range of 2.25% to 2.5%.
Talking to reporters in Mississippi, Atlanta Fed President Raphael Bostic said that he would discard the possibility of a rate cut triggered by the hike in import duty.
Bostic said: “Depending on the severity of the response, it could. It really depends. It depends on what businesses decide to do and then it depends on how long the tariffs are in place.”
The statement encouraged market participants to increase their bets on a rate hike by the end of this year. As rate cuts, in general, encourage an outflow of investments, the US dollar turned weak. The selling intensified after China issued a statement revealing its plans to raise import duty on $60 billion worth of US goods.
Beijing is implementing its promise to adopt “necessary countermeasures” in reaction to the US tariff hike, even though Trump says the scenario “will only get worse” if China hits back. China yesterday stated that 5,140 US products would be subject to an increase in import duty. The tariffs, which would increase between 5% and 25%, would become effective on June 1st, 2019.
Fundamentally, the greenback is expected to remain volatile until the China-US trade issue is resolved.
The historical price chart indicates the USD/JPY currency pair has started declining after facing resistance at 109.80. The next major support exists only at 108.10. The currency pair is trading below its 50-day moving average. Additionally, the momentum indicator is making new lows. As a result, we can expect the currency pair to move down 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.
