CURRENCY WAR: What Threats Face Global Markets ?

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The world seems to be on the verge of a currency war. This, according to Bloomberg, refers to the publication by US President Donald Trump on his Twitter accusing China and the EU of manipulating their currency and interest rates.

“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…” he said.

These comments came after the yuan fell to the lowest levels recorded this year and after the devaluation of the euro.

As a rule, companies oriented to export their goods abroad have a negative influence on the increase in the exchange rate of the national currency, taking into account that their growth increases the prices of exported products and reduces sales volume. All this at the same time also causes the reduction of production.

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According to Bloomberg, as the world’s largest economies are balancing on board a trade war, the aftermath of its onset may go further and affect not only the currencies of China and the US but also the stock market, oil and emerging markets.

Robin Brooks, chief economist at the Institute of International Finance, believes that the devaluation of the yuan that occurred in 2015 provides a good model for what might be a future expansion of malaise in the markets.

According to Brooks, risk assets and oil prices could fall, plunging in relation to foreign exchange, such as the Russian ruble, Colombian peso or Malaysian ringgit. Subsequently, this wave of collapses will affect the rest of Asia. However, Brooks believes that emerging markets in Asia could suffer heavy losses in the next six months.

With all this, the US dollar is likely to continue to depreciate, taking into account that investors are closing the long dominant position of the currency.

The long term position is understood as the purchase of a financial asset with the forecast that it may increase in value in the future.

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