Dollar Marches Higher as Trade Tensions Heat Up

Dollar Index Daily Chart

The U.S. Dollar Index continued its steady ascent, nearing two year highs on Thursday as trade tensions between China and the United States intensified. The index gauges the value of the dollar relative to a basket of six major currencies.

China-US Trade War

A slew of alarming headlines has left the markets rattled this week and given rise to a ‘risk-off’ atmosphere. President Trump said on Monday that the U.S. is “not ready” for a trade deal with China. The People’s Daily, China’s largest state owned newspaper, followed up on Wednesday with a commentary titled “United States, don’t underestimate China’s ability to strike back”.

This warning was in turn followed on Thursday by Chinese Vice Foreign Minister Zhang Hanhui stating that provoking trade disputes was “naked economic terrorism”.  The news in particular sparked fears that China could restrict its export of rare earth materials, which are essential components widely used in high-tech consumer electronics.

The U.S. dollar has been boosted by virtue of it’s safe haven appeal. Meanwhile the Japanese Yen, which is normally in high demand during tumultuous periods, has been held down by domestic demand for dollars according to analysts.

Rate Cuts

Concerns over the trade war have led analysts to expect two Federal Reserve rate cuts by 2020, amid concerns over slowing global economic growth and soft industrial production, retail sales and durable goods figures. Previously the markets had anticipated only one rate cut.

The Bottom Line

With the world’s two largest economies engaged in an escalating trade war and no end in sight,  investors fear a simultaneous slowdown in both the U.S. and China. Equity markets have been shaken this week, with the Dow Jones Industrial Average falling to a new 3-month low. Analysts focus now shifts to U.S. preliminary GDP, scheduled for release later on Thursday.