Home Economics Back From Never Gone: CURRENCY WARS

Back From Never Gone: CURRENCY WARS

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In the previous episode of the currency wars, a few years ago, the Euro-Dollar exchange rate was in the spotlight. This has now completely disappeared to the background and whilst the countries of the Eurozone must be pretty happy with the weak currency (which boosts the export and increases the demand for domestically produced goods), the United States are less than happy as it weakens the position of the country on the export market.

China 4

Source: Tradingeconomics

You might have missed it when the mass media were falling over themselves to crucify president Trump, but we had the impression currency wars, and protecting the position of the United States on the world market were pretty high on his ‘to do list’ after decades of huge trade deficits. As you can see on the next image, there clearly is a huge discrepancy in the trade numbers between China and the United States. A substantial trade deficit, which has been nipped in the bud by China using their hard dollars to purchase US Treasuries.

China 2

Source: Danske Bank

Whereas the president was definitely pointing fingers at China during his election campaign, he seems to have been softer after a recent call with the Chinese president.

Does this mean the USA and China are now best buddies again? Probably not. It’s far more likely the president has realized he won’t be able to get much done when he gets in a direct confrontation with China. His staff has now launched a ‘test balloon’ and widened the scope of the currency manipulation investigation. Instead of singling out China, the White House will now be using a more general approach, and has even singled out Germany.

China 1

Source: Danske Bank

In order to be able to ‘sell’ this idea to concerned countries and entities, the Trump administration might present its own ‘alternative facts’, according to the Wall Street Journal. Even though the trade deficit between the United States and China is very clear in the previous image, it’s entirely possible the White House will introduce a new standard to calculate the trade deficit, to increase the deficit numbers.

According to a paper published by the Trump camp during the election campaign, China was really the main focus of the Economic plan. According to the paper; ‘In a world of freely floating currencies, the US dollar would weaken and the Chinese yuan would strengthen because the US runs a large trade deficit with China and the rest of the world. American exports to China would then rise, Chinese imports to America would fall, and trade should come back towards balance’.

China 3

Source: The Trump Economic Plan

That’s an absolutely accurate description, and even in the white paper, the Trump camp looked to things on a larger scale instead of focusing on China. Even the European Monetary Union and specifically Germany were singled out as examples of ‘currency manipulators’.

So don’t be surprised if the White House suddenly announces a plan to use a new method to calculate the trade deficits, in order to make the deficits appear to be larger than they really are. And this could absolutely re-shape the world and increase the impact from currency exchange rates. This doesn’t mean things will definitely change for the worse, but it’s always a very thin line when you’re dealing with powerful trading partners.

It will be difficult to create a win-win situation, but let’s hope it doesn’t turn into a lose-lose situation, as that could cripple the worldwide economy again.

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