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Australian Dollar US Dollar (AUD/USD) Exchange Rate Fluctuates on Threat of Global Trade War

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Risk Aversion Rises as China, EU, Threaten Tariff Retaliation – AUD Exchange Rates Fluctuate

The Australian Dollar US Dollar (AUD/USD) exchange rate fluctuated on Monday as both currencies suffered a loss in demand as the EU and China responded to US President Donald Trump’s tariff proposals.

President Trump caused a stir last week when he announced his intentions of applying a 25% tariff on steel and a 10% tariff on aluminium, but this has escalated this week with both China and the EU threatening to retaliate.

Indeed, China’s Vice Foreign Minister Zhang Yesui has announced that Beijing will not let its interests be damaged, whilst EU Commission President Jean-Claude Juncker has threatened that the bloc could apply tariffs on big American brands like Harley-Davidson and Levi Strauss.

In this respect, riskier, commodity-based economies like Australia’s could be in-line to suffer, not as a direct result of the steel tariffs, but if retaliatory measures from China do occur.

Kristian Kolding and Chris Richardson from Deloittee Access Economics shared this assessment, stating:

‘Yes, the world economy would take a hit, which would see lower prices for Australian exports such as coal and iron ore. But the resultant weaker world growth and lower commodity prices would hurt the Australian Dollar more than most other currencies, meaning the local currency would fall against the $US in the first year’.

US Dollar (USD) Exchange Rates Encumbered by Possibility of Trade War

US Dollar (USD) exchange rates were also limited by the threat of a trade war on Monday, with markets opting for caution in the face of possible escalation.

Viraj Patel, Analyst at ING Bank asserted that a trade war would be negative for the US Dollar, as it could push the global economy away from a positive reflationary narrative towards negative stagflation.

Patel stated:

‘For currency markets, ‘America First’ policies in our view equates to ‘Dollar Last’ – with the USD pricing in a greater US trade policy and political uncertainty premium in the run-up to the Nov midterms. Risks are that we see another 5-10% decline in the trade-weighted USD in 2018’.

Nonetheless, the steel and aluminium tariffs on their own could be seen as positive for the US economy and indeed the ‘Greenback’, simply by reducing demand for foreign steel imports and promoting factory growth within the US.

RBA Rate Decision on the Horizon – What can Markets Expect for the AUD/USD Exchange Rate?

The Australian Dollar US Dollar (AUD/USD) exchange rate could encounter even more volatility tomorrow as markets react to the Reserve Bank of Australia’s (RBA) latest rate decision.

Markets are current unified in the outlook that the RBA will not be moving for a rate hike this month, with private sector wage growth in Australia continuing to prove sub-par and inflation remaining sluggish.

The accompanying policy statement could provide something newsworthy, however, though this would depend on the bank shifting in their outlook.

If they prove more cautious than they were previously then the AUD/USD exchange rate could come under even more pressure.

Conversely, surprising optimism could give the ‘Aussie’ Dollar a little shot in the arm.