Tuesday, April 7, 2020
United States Declares Currency War
Washington Targets China
United States Declares Currency War
  • By Jung Suk-yee
  • May 27, 2019, 09:48
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The Donald Trump administration has decided to impose countervailing duties on countries it regards as currency manipulators.

The Donald Trump administration decided on May 23 (local time) to impose countervailing duties on countries it regards as currency manipulators. This means the United States has added foreign exchange rates to its trade war.

This attempt to connect tariffs to foreign exchange rates can lead to an all-out trade war and global stock market fluctuations. Major exporters to the United States, such as India, South Korea, Japan and Germany, could take a direct hit.

It is the United States Department of the Treasury that is to determine the presence or absence of currency devaluation by country. Specific criteria for the determination in relation to the competitiveness of imported goods are yet to be revealed. Still, it is clear that the measure aims at China. The yuan-dollar exchange rate has risen from 6 yuan to 6.9 yuan per U.S. dollar since late 2013.

The Chinese government is planning to block the rate from exceeding 7 yuan per U.S. dollar, which means it is unlikely to devalue the yuan. Once the rate exceeds 7 yuan per U.S. dollar, foreign currency outflow can accelerate and China may find itself in a disadvantageous position in trade negotiations. On May 24, the People's Bank of China fixed its reference yuan-dollar exchange rate at 6.8993 yuan, down 0.0001 yuan from the previous day, to conduct revaluation in 12 days. The rate in the offshore market, which topped 6.94 yuan lately, is currently around 6.91 yuan per U.S. dollar.

Nonetheless, the Chinese government has been suspected of intervening in the market because the yuan has depreciated year after year in spite of China’s huge trade surpluses. In addition, many experts are predicting that China will cause or allow the yuan to depreciate for the sake of export competitiveness if its trade war against the United States continues.

Immediately after the news about the new duties, the New York Stock Exchange fell and commodity markets were jolted. For example, the price of WTI for delivery in June closed at US$57.91 per barrel at the NYMEX, falling 5.7 percent from the previous day to post the steepest day-on-day drop since the beginning of this year. The IMF warned that the escalation of the trade war between the two superpowers can decrease the global economic growth rate by 0.3 percentage points in the short term.