Last week, the United States announced the introduction of new tariffs on Chinese imports, in response to which China has allowed its national currency to fall to record lows.
Washington's reaction was not slow. The US administration has officially recognized China as a currency manipulator.
"The goal of China's devaluation of the national currency is to gain an unfair competitive advantage in international trade," the US Treasury said.
China has rejected all the accusations against it.
"This stigma is completely inconsistent with the criteria set by the US Treasury for countries engaged in manipulating the exchange rate. Action from the United States is a one-sided and protectionist act that seriously violates international standards. This will have a serious impact on the global economy," according to a statement from the People's Bank of China.
According to analysts, the decision of the US Ministry of Finance to classify China as currency manipulators could lead to the outbreak of a currency war between the two countries.
"The implications of China's recognition of the currency manipulator could be colossal. The United States may use this decision as a pretext for introducing additional unilateral prohibitive duties. This will lead to the closure of all imports from China, " warns professor of Cornell University Esvar Prasad.
It is assumed that if Donald Trump feels that the US economy will slow down against the backdrop of current events, the possibility of conducting currency interventions with the aim of weakening the dollar will again be on the agenda.
Serious pressure on the greenback is currently being exerted by recent expectations that the Fed will aggressively weaken monetary policy.
The probability of a federal funds rate cut by 25 basis points at the September meeting is now estimated at more than 75%. It is noteworthy that a week ago the chances of an additional round of rate cuts were only 60%.
"The US central bank seems to be held hostage by markets for which the expectation of cheap money is the only argument in favor of growth," Raiffeisenbank analysts said.
"There is another important factor - the pressure from the US president, who desperately needs economic growth to be re-elected for a second term and who has been raining tweets on the Fed for more than a year, calling the leadership of the US central bank incompetent and demanding a weaker dollar to win the trade war with China," said MUFG economist Chris Rupkey.
Citigroup believes that if the Federal Reserve cuts rates in an attempt to smooth out the impact of the global GDP slowdown on the US economy, the monetary policy created by protectionism will not solve the problems.
According to Judy Shelton, who was recently nominated by D. Trump as an official of the FOMC, monetary stimulation is more effective for manipulating currencies than for accelerating economic growth. This is again an argument in favor of the fact that by increasing tariffs on Chinese imports, the owner of the White House provokes an escalation of not only trade, but also currency war.
Apparently, the head of the US administration decided to raise rates at the same time both in discussions with the Federal Reserve and with Beijing.
However, for strong EUR/USD growth, just wanting to weaken the greenback is clearly not enough, and buying the euro should be considered only in the event of breaking resistance at 1.133 and 1.137, while a return to support at 1.1175 and 1.112 will create the prerequisites for opening shorts.
The material has been provided by InstaForex Company - www.instaforex.com