The President of the United States, Donald Trump, has changed from tough rhetoric to practical actions. On Monday, the tariffs on solar panels were increased by 50% while tariffs on washing machines added 30% for the next 4 years.
According to media reports, Trump expressed dissatisfaction with the results of the negotiations of Wilbur Ross’s trade minister with the Chinese side, as there were no significant changes. The trade deficit not only did not decrease, it even resumed the movement towards growth in the second half of last year.
The decision to raise quotas is obviously only the first step. Similar measures are expected for the import of aluminum and steel. On this issue, the struggle will include Japan and Germany with the exception China. The EU immediately warned that any unilateral actions will be immediately retaliated with a symmetrical response.
On January 30, Trump will speak in Congress. It is expected that he will report the results of the investigation on the transfer of intellectual property rights in exchange for access to markets. It is also expected that the results may give rise to sanctions against China in high-tech sectors.
China once again expressed its strong dissatisfaction with the US’ attempts to act on the basis of the WTO principles rather than the norms and the domestic legislation. South Korea warned that raising duties on washing machines would lead to counter measures against American products.
Thus, the US this week could cause dissatisfaction with China, Germany, Japan, and South Korea. What’s next? At first glance, the US position is strong since adequate measures on the part of these states are difficult because they import much less American goods than they export to the United States. However, the answer can also be asymmetric, because any difficulty in trading will lead to a decrease in the demand for the dollar as a means of settlement, thereby damaging its global status.
Perhaps this is one of the reasons why the dollar cannot go to at least in a correction. Trump’s policy is aimed at the growth of domestic protectionism which inevitably must be accompanied by the closure of the US market and as a consequence, by a decrease in demand for the dollar.
Add here the shutdown of the US government, which happened on Saturday. Negotiations with the democrats failed to achieve progress. This clearly added confidence to the bears as there was a real danger of a drop in the US credit rating. This was impossible to admit because the demand for treasuries would have decreased due to the need to review investment portfolios from the side of global investment funds. Trump reacted promptly by signing a law on the provisional budget which would allow the government to finance itself until February 8. Thus, the stoppage of the work lasted only 69 hours but the markets managed to react to the massive sell-off of the dollar.
However, even such an emergency solution is unlikely to lead to an increase in the dollar because it does not relieve the severity of the problem. A full-fledged decision on the ceiling of the national debt is necessary because the growth of the budget deficit and the reduction in the collection of taxes is due to the start of tax reforms.
The dollar, therefore, will remain under pressure for an indefinite period as the financial threat has not stopped.
Today, Markit will publish its data on preliminary PMI indices for the US. It is expected that a small increase in the service sector will happen. This could lead to the correction of the dollar but in the current conditions, the market is likely to not react.
The ECB meeting on monetary policy will be held tomorrow. It is possible to stop the growth of the euro but in the current environment, even the extremely soft rhetoric of Draghi at the press conference and the softening of the text of the accompanying comment will only give a temporary effect since the dollar sale is of a voluminous nature and can hardly be stopped before solving the domestic political problems of the United States.
On Friday, the situation may change as the euro’s factor will be played back and the publication of preliminary data on GDP in the 4th quarter and volumes of orders for durable goods may support the dollar.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
Performed by Kuvat Raharjo,
InstaForex Group © 2007-2018
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