Will A Trade War Between US and China Send The Dollar Tumbling?
According to conventional wisdom, trade wars are bullish for the dollar, for two main reasons: they tend to be inflationary (import prices spike), and they impact risk assets, resulting in a flight for USD-denominated safety. Indeed, just today, Bloomberg writes that for dollar bulls, Trump’s trade wars are just what the doctor ordered.
As the world’s largest economy, the U.S. had the strong hand in the early stages of trade negotiations. But, if it escalates into a sustained trade war, the U.S. position weakens substantially due to its twin deficits. It can’t afford to play such hardball that foreign governments become incentivized to stop funding its largesse.
On the other hand, if trade tensions abate, investors will releverage into EM and risk assets, which will result in a de facto selling of the world’s reserve currency.