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The dollar is drawn into the war

The dollar is drawn into the war

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Erik Holm - Head of media

The stabilization of the Chinese yuan and the worst decline in industrial production in Germany in almost a decade in June somewhat dampened the fervor of the bulls for EUR / USD. There are rumors on Forex that China is unlikely to seriously devalue its own currency. Theoretically, this will create a competitive advantage and make life easier for exporters, but in practice, it's more complicated. When most bills are paid in US dollars, USD / CNY rally leads to lower trading volumes.

According to IMF research, a 1% increase in the USD index slows world trade by 0.6%. At the same time, strengthening the greenback puts a spoke in the wheels of foreign investors. Most likely, PBOC's reluctance to hinder the USD / CNY rally above the psychologically important mark of 7, as experts expected, is a common weapon demonstration.

In the real world, there are plenty of deviations from theoretical constructions. Contrary to the large-scale trade war, China's exports grew by 3.3% in July. The main reason is the desire of American companies to get more goods from Chinese partners before activating a 10% tariff on $300 billion in imports from September 1. On the other hand, warehouses in the United States are overloaded, so we should not expect that net exports will contribute to a rebound in China's GDP from the region of the 28-year-old bottom.

Along with the slowdown of the global economy under the influence of a trade conflict, the Fed may be nervous about pulling it into a currency war. The central banks of New Zealand, India, and Taiwan have weakened monetary policy, and this is happening around the world! According to most of the 60 Reuters experts, if the federal funds rate drops by 75bp before the end of 2019, the US dollar will weaken significantly. The consensus forecast for EUR / USD after 12 months is 1.15, the lowest rating in the last 2 years. In the short term, a breakthrough in one of the boundaries of the consolidation range of $1.1175-1.1245 will help the euro to decide on the direction of further movement.