Since the beginning of April, the prices of the euro-dollar exchange rate have been moving within a narrow trading range beyond which we could witness a recovery in the directional phase. A possible trigger for a new directional phase could be linked to the trade/monetary war between the West and China.
The impact of a possible trade war between the West and China
A potential trade war between the West and China would likely see the US dollar as the sole “winner.” Uncertainty over global trade policies is at its highest level since 2018-2019, when tensions between the Trump administration and Beijing reached their peak. While we are not there yet, the issue will become more relevant as the US presidential election approaches.
Regardless of who wins in November, further tariffs on Chinese imports and possible retaliation seem inevitable. China has already warned that any European accession to the tariffs would constitute a “trade war.” Trump’s return to the White House would significantly raise the stakes.
Increased protectionism and reduced cross-border trade could slow growth everywhere, but the United States, thanks to its relatively closed economy, the relevance of its stock and bond markets, and the importance of the dollar in international reserves, is better protected compared to other countries. While the United States could also suffer with slower growth and rising inflation, the latter could delay or eliminate interest rate cuts by the Fed, making the U.S. economy less vulnerable than Europe and Asia.
Goldman Sachs economists estimate that a rise in trade policy uncertainty to 2018-2019 levels could reduce US GDP growth by three-tenths of a percentage point, while the impact for the eurozone would be three times greater. The already low growth forecast for the eurozone (0.8% this year and 1.5% next year) would be significantly affected, with the possibility of strong monetary easing by the European Central Bank that could weaken the euro.
The U.S. economy is less open than those of Europe or China, so trade disruptions would have a relatively limited impact. In 2022, U.S. exports of goods and services accounted for 11.8% of GDP, compared with 20.7% for China. The narrowing of the U.S. trade deficit in recent years, combined with energy self-sufficiency and a recovery in domestic manufacturing, suggest that the deficit will not be as much of a drag on the dollar as it has in the past.
China’s domestic economic woes and geopolitical position are dampening foreign investment, while Chinese stocks are underperforming and the yuan is at a seven-month low against the dollar. Trade tensions between China and Europe will hit the euro, which is a major weight in the dollar index, hard. Deutsche Bank analysts expect the dollar to remain “stronger for longer” this year and next, but a more hawkish trade stance by the next U.S. president could further strengthen the dollar and push the euro toward parity.
The tug of war between the euro and the dollar continues, who could win? The indications of the graphic analysis
As has been happening for about three months now, the uncertainty phase on the euro-dollar exchange rate continues. With a weekly close above 1.0865, a bullish reversal could have materialized, which could develop according to the scenario indicated in the figure by the dotted line. The bears, on the other hand, could find strength from a weekly close below 1.0628. In this decline, the decline could develop according to the scenario indicated in the figure by the solid line.
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