The Economist UK - 10.08.2019

The EconomistAugust 10th 2019 57

1

C

arl von clausewitz, the Prussian mil-

itary theorist, never wrote about cur-

rency wars. But some policymakers see

them in his terms: as the continuation of

trade politics by other means. That, at least,

is how the Trump administration views

China’s decision on August 5th to let its

currency weaken past seven yuan to the

dollar for the first time since 2008. Though

arbitrary, that threshold has assumed huge

symbolic importance among traders, eco-

nomic officials and fund managers (see

Buttonwood). They were left stunned.

America’s Treasury quickly branded

China a “currency manipulator”, a charge it

has not levelled against any country for 25

years. China, in the Americans’ view, was

cheapening its currency to gain an unfair

edge in retaliation for President Donald

Trump’s surprise announcement four days

earlier that he would impose new tariffs of

10% on roughly $300bn of Chinese goods.

This marked the end of investors’ hopes

for a peaceful summer. At the end of July

the Federal Reserve had cut interest rates to

guard against a slowdown in America’s re-

spectable growth rate, and trade tensions

had “returned to a simmer”, as Jerome Pow-

ell, the Fed’s chair, noted with satisfaction.

But after the yuan’s move America’s stock-

market suffered its worst day this year.

Emerging-market currencies, including

the Brazilian real, Indian rupee and South

African rand, fell. The price of Brent crude

oil tumbled below $60 a barrel and safe ha-

vens, such as gold, rallied. The same search

for safety pushed American ten-year gov-

ernment bond yields to 1.7%, as investors

bet that the Fed would be forced to slash in-

terest rates further to prevent a recession.

The Reserve Bank of New Zealand cut its

benchmark interest rate by twice as much

as expected, citing “heightened uncertain-

ty” and “historically low” global bond

yields. The Australian dollar fell to its low-

est level in a decade.

In matters of war and peace, countries

must prepare for the worst. But precau-

tions can look like provocations. In allow-

ing the yuan to fall, China signalled it is

prepared for a protracted trade war. It let

the yuan weaken in response to the threat

of tariffs much as a floating currency

would. Otherwise it would have needed to

defend an arbitrary line against the dollar

every time America turned belligerent. Its

move nonetheless makes further bellige-

rence more probable. Mr Trump is now un-

likely to change his mind about the new ta-

riffs before they kick in on September 1st.

Both sides blame the other for starting

the fight. China has raised tariffs only in re-

sponse to America’s. But America sees its

combative economic diplomacy as a belat-

ed response to decades of intellectual-

property theft and other misdeeds. Each

side’s attempt to get even looks to the other

like one-upmanship. China views a weaker

yuan as a reasonable response to Mr

Trump’s trade duties; Mr Trump, according

to the Wall Street Journal, sees those tariffs

as retaliation for China failing to commit to

buy more American farm goods.

The irony is that Chinese purchases of

American soyabeans and pork were already

rising, and the government was offering

Currency wars

The guns of August

The trade war escalates, and the fog of war descends

Crossing the line

Source: Datastream from Refinitiv

Yuan per $, inverted scale

ASOND

2018

JFMAMJ JA

2019

7.1

7.0

6.9

6.8

6.7

6.6

Finance & economics

58 Buttonwood: The meaning of seven

59 John Flint leaves HSBC

59 Speeding up payments

60 Bond yields turn negative

61 Indian finance goes upmarket

62 Free exchange: Cut-price economics

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