To Trump's Chagrin, Trade Standoff Helps Power Dollar Higher

(Bloomberg) -- Just two weeks after U.S. President Donald Trump lamented how the dollar's strength is reducing America's competitive edge, the administration's latest trade threats are paving the way for further greenback gains.

The dollar strengthened against a broad swath of emerging-market currencies Thursday, the day after Trump directed staff to consider raising tariffs on imported Chinese goods to 25 percent from 10 percent, prompting vows of retaliation from Beijing. The fallout saw China's yuan weaken to its lowest level since May 2017, while the South African rand suffered its worst drop in two weeks.

A cheaper dollar may continue to elude Trump as trade tensions escalate, says Jim Caron at Morgan Stanley Investment Management. With anxiety building over the growth implications as the U.S. and China exchange threats over trade, emerging-market currencies stand to suffer, while the dollar's haven status attracts flight-to-quality flows, he said.

“When there are worries about trade, the dollar gets bid because there's fears that this could lead to a bigger slowdown globally,” said Caron, who helps oversee $80 billion in fixed-income assets. “It does counter what effectively Trump would want, which is better terms of trade.”

Caron has been reducing his portfolio's dollar underweight this year to reflect that haven dynamic, although he expects the currency to resume weakening over the next one-to-two years.

Day of Dominance

The yuan has now depreciated almost 5 percent this year against the dollar. In addition to dominating emerging-market currencies Thursday, the greenback gained against nearly all of its Group-of-10 peers as well -- the yen, a haven play, was the most resilient in the face of greenback strength.

The yuan slid Thursday even as the People's Bank of China set the currency's reference rate against the dollar stronger, after several days of weaker levels. The discrepancy suggests traders and investors are bidding up the dollar rather than an attempt by Chinese policymakers to weaken the yuan, said Sacha Tihanyi, an emerging-market strategist at TD Securities.

Tihanyi also expects the greenback to climb, counter to the U.S. president's wishes, as trade barbs unnerve financial markets. While Trump would like to increase America's trade competitiveness, it's difficult to achieve that while concern over a global slowdown drives investors into the dollar, Tihanyi said.

“If there were no concern about global trade policy and how that could affect global growth dynamics, it's likely that the dollar would be much softer than it is right now because investors would be more risk-loving,” Tihanyi said.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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