Some people say a trade war is a necessary evil to get a point across as a nation. Others may think that a trade war is an unnecessary attempt at a show of strength that hurts a country more than helps it. Regardless of what your view on trade wars are, the fact remains that it does change the worth of a currency on the trade floor. The U.S. has been involved in quite a few trade wars in the past from the Banana Wars to the Boston Tea Party, and many more. The trade war with China won’t be all that different in the fact that we will more than likely see some fluctuations in the USD. So, whether you’ve traded your fair share of trade wars like Shawn Lucas or this is your first, here are some things that could cause a change in the Dollar.
One of the most direct to trading results that come about from a trade war is devaluation of the nations currency. To offset the effects of the trade war and for the country to take less of a hit, you will see that sometimes, a country will devalue their own currency to minimize the risk to them. In July 2018, when tariffs were being talked about on both sides of the trade war, the Peoples' Bank of China set the exchange rate of the USD/CNY to 6.7671, an almost 1% drop in the Yuan. Shortly after that drop, a tweet from U.S. President Trump had to do with an over 1% fall in the U.S. dollar Index, a measurement of the USD in comparison to multiple currencies to gauge its overall value.
Another direct result of trade wars comes in the implementation of tariffs. A tariff, for those unfamiliar, is a tax on an import. So, if a 5% tariff is placed on all Chinese goods, when China sells, say a car, to the U.S. which would normally cost $10,000, the tariff changes that price to $10,500. This is done to make those foreign goods less appealing to the consumers in the nation and ultimately drive down sales and profits from the opposing country. Depending on the item that the tariff was placed on, domestic manufacturers may increase their prices slightly to make more profits since competition is reduced or it could make what the cheapest option was more expensive rising the cost people have to pay regardless. In either of those cases, this can cause inflation to increase or household expenditures increase faster than income and negatively impact households.
As for U.S. exporters, with the U.S. implementing a tariff, China will come back with one, or what is currently happening with soy, halt imports all together. This results in exports to the U.S.’s largest trade partner drastically decreasing which can cause a sharp decline in sales by U.S. corporations and in terms of farmers, an excess of goods that can spoil and cause huge losses. In a previous YouTube live, you can see Shawn Lucas discussing tariffs, while in terms of the BREXIT negotiations, the information is still applicable. Watch it here. The outcome from this will ultimately be who caves first and who holds out longest trying to profit.
No matter what you think should or shouldn’t happen with the trade war, it has begun. At this point, as a consumer, you may see prices change and as traders, you will see the USD fluctuate. Depending on the course of the trade war will change when what fluctuations happen. All we can really do as traders is sit back and analyze the markets, have good stop losses, and wait to try and profit off of what is going on.