What Does It Mean That The Dollar Is Rising Against The Chinese Yuan? Global Currency War Has Begun

Trump has been making a mess of US economic policy. And the Fed and monetary policy of lower interest rates cannot ‘save’ him.

By Jack Rasmus
Global Research (8/5/19)

Over this weekend, China’s Yuan currency broke out of its band and devalued to more than 7 to $1. At the same time China announced it would not purchase more US agricultural goods. The Trump-US Neocon trade strategy has just imploded. As this writer has been predicting, the threshold has now been passed, from a tariff-trade war to a broader economic war between the US and China where other tactics and measures are now being implemented.

Trump will no doubt declare that China is manipulating its currency.A devaluation of the Yuan has the effect of negating Trump tariffs imposed on China. But China isn’t manipulating its currency. Manipulation is defined as entering global money markets to buy and/or sell one’s currency in exchange for dollars (the global trading currency) in order to influence the price (exchange rate) of one’s currency in relation to the dollar. But China is not doing that, so it’s not manipulating. What’s happening is the US dollar is rising in value (or expected to) and that rise in effect lowers the value of the Yuan. The same is happening to other currencies as well,as the dollar rises. Why is the dollar then rising? There’s a global stampede to safety and that means buying US Treasuries–which are now in freefall in terms of interest rates (and escalating in terms of price). Prices from one year or even less, to 10 and 30 year Treasuries are accelerating. But to buy Treasuries, foreign investors must sell their currencies and buy dollars before buying Treasuries. That escalating demand for dollars is what drives up the value of the dollar, which in turn drives down the value–i.e. devalues-the Yuan in relation to the dollar.

In short, the US-China trade war, the slowing global economy (now about to spill over to the US economy), the US budget deficit, and Fed interest rates are all inter-related. Trump policies are creating economic havoc on all these fronts.

In other words, the slowing global economy which is being driven by the Trump trade wars is what is causing the flight to the dollar and to the safe haven of US Treasuries. Trump’s policies are at the heart of the global slowdown (already in progress due to fundamental forces stalling investment and growth). That slowdown is what’s driving the dollar and in turn lowering the Yuan. Trump policies are ‘manipulating’ the Yuan.

China is of course allowing the devaluation to occur. Previously, it was entering money markets to buy Yuan in order to keep it from devaluing. Now it’s just allowing the process to occur. This is China’s response to Trump’s imposing an additional 10% tariffs on $300 billion of China imports last week. It signals that the ‘trade’ war (now becoming an economic war) has moved beyond tariffs.

With Trump’s recent actions, and China’s now response, the potential for a trade agreement in 2019 looks even more unlikely than before. …

(This article was originally published on the author’s blog site: Jack Rasmus.)

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(Commoner Call photo illustration by Mark L. Taylor, 2019. Open source and free for non-derivative use with link to www.thacommonercall.org )