Dollar the loser if trade war erupts

Dollar the loser if trade war erupts

A clerk scrutinises 100-dollar US banknotes for counterfeits at the headquarters of the Korea Exchange Bank in Seoul on Tuesday. (EPA-EFE photo)
A clerk scrutinises 100-dollar US banknotes for counterfeits at the headquarters of the Korea Exchange Bank in Seoul on Tuesday. (EPA-EFE photo)

NEW YORK: For investors struggling to handicap whether US President Donald Trump can stomach a full-blown trade war, some analysts boil the risks down to this: the dollar stands to lose.

Greenback bulls should enjoy the currency's seven-week rally while they can, say Goldman Sachs and Deutsche Bank analysts. Should a spiral of retaliatory tariffs ensue, the threat is diminished global growth, quicker US inflation and an uncertain end game that undermines global confidence in American assets, in Deutsche Bank's view.

As the Trump administration heads for a showdown with some of its closest allies, lessons from US protectionism dating to the 1970s show that the dollar always suffers in the end, because markets will speculate that US officials want a weaker currency, according to Goldman Sachs.

"Past periods of protectionism in US history have actually been associated with subsequent dollar weakness, not dollar strength," said Zach Pandl, co-head of global forex strategy at Goldman Sachs. "We think that something similar can play out now."

Trade friction helps form the backdrop for Goldman Sachs's view of a dollar depreciation to $1.25 per euro in 12 months, from $1.17 now.

The European Union and Canada have already threatened retaliatory measures unless Mr Trump reverses course on new steel and aluminium tariffs. China has warned it will withdraw commitments it made on trade if Mr Trump carries out a separate threat to impose tariffs.

The state of affairs has analysts harking back to the past century. Mr Pandl finds plenty of precedents, starting with the Nixon administration, to establish a pattern of US tariffs leading to dollar declines.

For example, he draws a line from President George W Bush's 2002 move to raise steel tariffs to protect against imports, to a subsequent slide in the dollar and China's de-pegging of the yuan in 2005. Not to mention the Plaza Accord in 1985 that weakened the dollar and followed a period of protectionism under Ronald Reagan.

For Torsten Slok at Deutsche Bank, it's all about policy uncertainty and the inflation outlook.

"If you impose tariffs, especially at an extreme degree and have retaliation and an effective uncertainty tax, then it should be weakening the dollar," said Mr Slok, the bank's chief international economist. "Foreigners probably look at the dollar and feel they don't really understand where this trade policy is all going and what is the end game, and lose confidence."

Tariffs will lift inflation by boosting import prices, especially as Mr Trump has focused levies mostly on intermediate goods, which will raise input prices for US companies, Mr Slok said. This will also push up treasury yields as traders will fret about inflation since some indicators are already near the Fed's 2% target, he said.

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