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The trade war between the United States and China kicked into overdrive during the first full week in August. Markets were spooked as the Federal Reserve had just reduced interest rates because of the uncertainty surrounding trade negotiations. While aides of President Trump were against provoking the Chinese and did not want to break the truce President Trump and President Xi agreed to in June, President Trump overruled this request.  

Volatility Surged

The VIX volatility index surged to 25 during the first week of August but eased during the latter part of the week. The online forex trading market experienced large swings as volatility in the forex space surged. The trade war’s August escalation has spooked markets, as well as central banks, around the world. The Bank of New Zealand, the Bank of Indian and the Bank of Korea all cut interest rates more than expected to deal with the uncertainty surrounding the trade war.

Trump Has Other Weapons

The bad news, though, is that while President Donald Trump has fired two large weapons this week by green-lighting his biggest portion of tariffs yet and formally branding China a currency manipulator, his arsenal is far from exhausted. President Trump is now focusing on the dollar and attempting to weaponize it as he sees that China is letting its currency slide versus the greenback.

Trump’s message in several tweets called for the Federal Reserve to cut rates and weaken the dollar to benefit American exporters. His message is that the dollar is high because interest rates are high related to other US counterparts. While the President wants the Fed to cut rates quickly, many of the US’s trading partners have interest rates below zero. While the US economy does not need additional cuts, Trump wants to use interest rates to help fight his trade war. He appears to be frustrated that President Xi has control of the Chinese central bank giving him an unfair advantage.

The Chinese Currencies Slides

China for its part is also rolling out the big guns. For the first time since 2008, the Chinese currency was fixed by the People’s Bank of China below 7-yuan to the US dollar. The Yuan has declined more than 10% over the past year, which has helped Chinese exporters. If Trump sets tariffs of 10% and the currency falls by 10%, then the next effect on Chinese exporters is zero. This issue has not fallen on deaf ears. Trump is very concerned that China is in it for the long haul. In fact, Chinese newspapers have claimed that Xi is ready to hold off on any negotiations and wait for the tariffs to begin to hurt the US economy ahead of the 2020 elections. Since Xi will never be running for re-election, he has time on his side which is not the case for President Trump. While Trump could attempt to weaponize the US dollar, it’s unclear how successful this strategy will be.