The economic cold war between the United States and China began last year as a result of increased tariffs. Both countries would be negatively impacted by a trade war, however, repeatedly both the US President Donald Trump and China’s President Xi Jinping escalate tensions stepping closer to a full blown currency war which will shred business confidence, close factories and increase unemployment around the world. Neither leader of the two superpowers is willing to back down which means the global economy is now preparing to be rocked by the effects of a currency war. But is it possible Donald Trump’s conflict with China could actually benefit the euro?
The trade war has been hailed as a debilitating force on the global economy with financial experts warning that tensions between the two countries could impact many other countries.
A currency war between these two superpowers could, according to the International Monetary Fund’s World Economic Outlook report lead to a reduction in global economic growth and the continued weakening of investment.
But now it seems that the euro may actually benefit from the growing tensions.
Trade tensions have sent the stock market into a state of heightened panic leading to a rush of investment into perceived “safe haven” assets such as gold, the Japanese yen and government bonds.
Another currency that is performing extremely well amid difficult conditions for many is the Swiss Franc which moved to its strongest level since June 2017 on Monday.
The Swiss France is considered to be a safe haven asset given the stability of the Swiss government and its financial system.
The country also has a low rate of inflation and people have confidence in the Swiss National Bank, Switzerland’s central bank.
With the escalation of US-China trade war tensions, a rival could emerge for the European Central Bank as a major buyer of euro-area debt – the Swiss National Bank (SNB).
The Swiss currency’s rise to a two-year high is threatening the SNB’s goal to spur inflation and may see the central bank intervene to rein in the exchange rate.
To do this it would need to buy euros and subsequent invest in the region’s bonds, according to Commerzbank AG.
Benchmark German yields slumped to a record low of -0.55 percent this week after the US named China a currency manipulator, in response to the People’s Bank of China’s move to weaken the yuan to levels unseen since 2008.
The SNB may have already started to intervene with the central bank’s sight deposits, which are seen as an early indicator of its currency-market activity, jumping last week in the second consecutive sizable increase.
Last week the Swiss National Bank appeared to be buying foreign currency as trade tensions pushed the value of the safe-haven Swiss franc higher against the euro.
Sight deposits, a proxy for the central bank’s currency interventions, rose by 1.6 billion francs to 582.7 billion francs (£493.3 billion) in the week ending Aug 2, according to data published on Monday.
Analysts said that the increase indicated that the SNB had continued its foreign currency purchases to stabilise the franc.
The franc breached the 1.09 level versus the euro on Monday as expectations of monetary easing in both the euro zone, the United States and the escalating Sino-U.S. trade war made investors nervous.
The euro-area central bank is widely expected to announce that it is adding to its €2.6trillion (£2.4trillion) stockpile of debt in an effort to bring inflation back toward its close-to, but below 2 percent target.