Yuan to weaken further as U.S. and China dig in on trade war: Reuters poll

By Sumanto Mondal and Hari Kishan

BENGALURU (Reuters) – Chinese authorities will maintain their tight grip on the yuan and allow it to weaken further against the dollar to fight an ongoing trade war with Washington and a slowing domestic economy, a Reuters poll of strategists showed.

In response to U.S. tariffs on $ 30 billion of Chinese imports that came into effect this week, the People’s Bank of China set its yuan mid-point at an 11-1/2-year low versus the dollar.

That follows a decision last month to let the currency slip past the 7-per-dollar rate, a barrier few expected to be breached, reinforcing the view it will be a drawn-out battle. The PBOC allows the yuan to trade in a 2% range around a mid-point it fixes against the dollar each day.

The latest Aug. 29-Sept. 4 Reuters poll of nearly 60 strategists showed the yuan is expected to trade around 7.19 to the dollar in six months, over 0.5% weaker than Wednesday’s 7.15, before readjusting to 7.16 in a year.

That marks the third month in a row where analysts have lowered their yuan outlook.

“For currency markets, the last month’s tariff-inspired yuan fall is much more important than it would have been were China still a minor player in global trade,” said Kit Juckes, FX strategist at Societe Generale (PA:) in London. “U.S. President Donald Trump will have to wait longer – perhaps a lot longer – before he gets the weaker dollar he craves.”

Nearly two-thirds of analysts who answered an additional question said China would fight the U.S. trade war by depreciating the yuan further.

“There’s a risk the U.S. retaliates to yuan weakness, or to other currencies falling as a result of the yuan weakening. More tariffs could see more yuan weakness and more risk President Trump reacts to that, too. Dominos can fall over,” added Juckes.

The most pessimistic 12-month view, 7.75 per dollar in the latest and previous surveys taken after the yuan breached the 7 per dollar rate, is the weakest since polling began more than a decade ago for the currency. That suggests a clear bias toward a further downgrade.

While a weaker yuan is good for the world’s largest exporter of manufactured goods, a weaker currency is likely to be limited in its ability to cushion the blow from import taxes imposed by the United States.

“Weakening the yuan can’t benefit exporters if the tariffs are so high that they lose the orders altogether,” noted Tim Condon at ING in Singapore.

To counter the economic slump, the PBOC reformed its key interest rates last month, establishing the loan prime rate as its main policy rate, aimed at lowering real interest rates for companies as part of broader market reforms.

About 70% of respondents who answered a separate question said China’s decision to change its interest rate system was not a step toward allowing the yuan to trade more freely.

(Polling by Anisha Sheth and Shaloo Srivastava; Editing by Sam Holmes)

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Let’s block ads! (Why?)

Forex News

Wait … Trump Admin have been discussing a currency transaction tax that could weaken the dollar

US media with a piece on policy options being canvassed in the White House

Via Washington Post:

  • Top White House advisers notified President Trump earlier this month that some internal forecasts showed that the economy could slow markedly over the next year
  • Administration officials have scrambled this week to assemble a menu of actions Trump could take to avert an economic downturn. Few aides have a firm sense of what steps he would seriously consider, in part because he keeps changing his mind.
  • Ideas that have been discussed include imposing a currency transaction tax that could weaken the dollar and make U.S. exports more competitive; creating a rotation among the Federal Reserve governors that would make it easier to check the power of Chair Jerome H. Powell … pushing to lower the corporate tax rate to 15 percent in an effort to spur more investment. 
US media with a piece on policy options being canvassed in the White HousePreparing the next policy initiative

ForexLive

Let’s block ads! (Why?)

Forexlive RSS Breaking news feed

Trump Wants the Fed to Weaken the Dollar. Powell Says That’s Not His Job

© Bloomberg. Jerome Powell in New York on June 25. Photographer: Cate Dingley/Bloomberg © Bloomberg. Jerome Powell in New York on June 25. Photographer: Cate Dingley/Bloomberg

(Bloomberg) — President Donald Trump wants a weaker dollar to help boost exports, and is counting on the Federal Reserve to help make that happen. But the central bank’s chairman, Jerome Powell, has made clear it’s not his job.

It’s a new twist in the broader pressure campaign the president has brought to bear on Powell to cut interest rates to energize the stock market and fuel growth.

Trump’s focus on the dollar surfaced last week after the European Central Bank said it might ease policy, prompting the euro to drop against the dollar. Trump seized on the move to say on June 18 that the Fed’s failure to lower rates was putting U.S. exporters at a competitive disadvantage. He later mused on June 26 he’d rather have ECB President Mario Draghi running the Fed.

Powell, once again, is finding himself on the defensive, trying to shield the Fed from political influence. He deflected Trump’s calls back at the administration.

“The Treasury Department — the administration — is responsible for exchange rate policy — full stop,” Powell said June 25 in response to a question from the audience after a speech in New York. “We don’t comment on the level of the dollar. We certainly don’t target the level of the dollar. We target domestic economic and financial conditions as other central banks do.”

Trump has explored options for removing or demoting Powell over the Fed’s interest rate decisions, which the president says have hampered growth. And the currency comments offer yet another point of tension between the world’s most powerful leader and its most influential central banker.

Last week, Trump accused both Europe and China of weakening their currencies to gain a competitive advantage. Some Wall Street banks are questioning whether the U.S. might intervene in currency markets.

“Make no mistake about it, what Draghi and other central banks are doing is the same as what China is doing — weakening their currencies,” said Dan DiMicco, who was an adviser to Trump’s campaign and presidential transition and now sits on an administration trade advisory committee.

The Trump administration has from the start deviated from a 20-year-old policy that a strong dollar was in the nation’s best interest. Treasury Secretary Steven Mnuchin said in 2017 that an “excessively strong dollar” could have negative effects on the American economy, and Trump has made similar comments since taking office.

“The repeated, intense comments by the president lead me to believe that we’re no longer pursuing a strong dollar policy,” said Nathan Sheets, chief economist for PGIM Fixed Income and a former Treasury official from the Obama administration. “This is a distinct, new chapter in U.S. currency management and strategy.

The strong-dollar mantra was developed by then-Treasury Secretary Robert Rubin in 1995. Underpinning it is the view that a robust currency reflects a healthy economy and bolsters foreign demand for U.S. debt by reducing the prospect of currency losses. While a stronger dollar helps American consumers by lowering the cost of imports, it also compounds manufacturers’ struggles by making exports less competitive.

Trump has an unlikely supporter in wanting a weaker dollar: Senator Elizabeth Warren, the Massachusetts Democrat who’s running for president. She proposes “actively managing” the dollar to counter foreign investors and central banks’ moves.

Trump and Warren’s ideas “very much could trigger a currency war,” said Fred Bergsten, an economist and author of “The Dollar’s Dilemma.”

But those who advocate that a weaker dollar is better for the U.S. say that former President Ronald Reagan’s administration was able to do it in the 1980s without destroying faith in the greenback.

In 1985, the U.S. worked with five countries, including Germany and Japan, to weaken the dollar in what was called the Plaza Accord. But such a deal is unlikely under the Trump administration, a senior White House official said.

“Our standing internationally is so weak and incoherent that the U.S. can’t pull something like this off,” said Steve Hanke, an economist at Johns Hopkins University.

Yet Trump believes that countries manipulate their exchange-rate through monetary policy, said the official, which is why the president is turning to the Fed for help.

Let’s block ads! (Why?)

Forex News

Euro zone bank profitability may weaken on slowdown: ECB

© Reuters. FILE PHOTO: Governing Council of the ECB monetary policy meeting in Vilnius © Reuters. FILE PHOTO: Governing Council of the ECB monetary policy meeting in Vilnius

FRANKFURT (Reuters) – Profitability across the euro zone bank sector is low and weakening growth could further dampen the sector’s prospects, European Central Bank Vice President Luis de Guindos said on Tuesday.

Negative ECB rates are not the cause of the weakness as super easy monetary policy has so far had a neutral effect on bank profits, de Guindos told a conference in Rome.

“Nevertheless, the overall effects of negative rates on the banking sector need to be carefully monitored, particularly because the balance of their effects will depend on how long rates remain in negative territory,” he added.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Let’s block ads! (Why?)

Economy News

Barclays on the Fed (not dovish) and the USD (won't weaken much)

Barclays on the fres Federal Reserve and the implications for the US dollar

From an overnight note

There appears to be little reason for the Fed to pull back from its tightening path, growth is still strong, citing influences:

  • fiscal stimulus will boost growth through until mid 2019, perhaps further
  • tax cuts have given a boost to incomes that continues
  • financial conditions are still accommodating
  • Markets may be over-interpreting the degree of caution intended by the Fed
  • failing to think fully through the consequences for the USD if foreign growth disappointments dampen the Fed’s path (even if growth ex-US is weaker its unlikely that will cause a USD sell off

Let’s block ads! (Why?)

Forexlive RSS Breaking news feed