USA

China selling its Treasuries: a warning to Trump?

There has long been speculation over whether China might use its huge portfolio of US Treasuries as a weapon in the (trade) war against the US. The latest data from the US Treasury Department is likely to add fuel to these speculations: Having already sold US Treasuries to the tune of USD 20 billion in March, China went on to sell further T bonds worth USD 10 billion in April. The volume of US Treasuries sold by China in the last twelve months thus amounts to an impressive USD 86 billion. As the chart below shows, this is not the first time China’s portfolio of Treasury bonds has fallen, and the current episode is also unlikely to break any new records. The Chinese had already disposed of US Treasuries in 2016, with the sales volume adding up to an even more impressive 150 billion US dollars. However, there is one…

US central bank faces a two-way dilemma

The US Federal Reserve will advise on further interest rate policy this week. It was still almost a foregone conclusion until recently that interest rates would continue to rise in the US. However, the trade conflict and the resultant growing concerns about growth have raised expectations that the Fed will lower the fed funds rate by up to three times in the course of the year. Some investors are not ruling out an interest rate cut even this week. The US central bank is now up against a dilemma once again. It is not in its interest to nip every key rate cut fantasy in the bud. This could lead to high levels of volatility on financial markets and conjure up far-reaching recessionary concerns. However, the Fed will not want to fuel market participants’ expectations of a quick and sharp reduction in key interest rates either. Consequently, it needs to…

The euro is not – and never will be – a lead currency

The US dollar is the world’s leading currency, a fact that serves to cement the economic dominance of the US. The US administration is increasingly exploiting this dominance. One reason why the US sanctions against Iran are so successful is the ability of the US to control international payments processing via Swift. This means that the sanctions policy adopted by the United States can also be imposed on companies from countries with no real interest in enacting this type of policy, such as Europe in the case of the Iran sanctions. For sovereignty over payment transactions entitles the US government not only to control access to the important US market but also to assert the US dollar as internationally recognized means of payment. There are of course good reasons for the dominance of the US dollar. The US is the world’s largest economy and the most important export market for…

Pressure on global politics and the global economy increases

US President Trump continues to escalate things further, most recently directing his ire against Mexico. As is so often the case, while the reasons he gave may seem plausible, higher customs tariffs are not about to solve the migration problem. Moreover, the announcement of higher customs may need to be seen in connection with ever louder calls for impeachment proceedings against him to commence. We can hardly expect that, going forward, the many disputes are likely to all be solved. And even if they were, the global economy is already being damaged. In Euroland, the Italian government now refuses to hold back. Following his success in the European elections, Minister of the Interior Salvini is now quite openly flaunting the fiscal rules and demanding a debt-financed growth programme for Italy. This way he may kick the populist door in the Eurozone wide open and further weaken the principle of stability….

Currency manipulation – the next level in the Cold (Trade) War?

For many market players, competitive devaluations are an integral part of a trade conflict. The dispute between the USA and China, which has been openly waged for more than a year now, is becoming increasingly heated. But so far it has remained confined to a fatal spiral of punitive tariffs and countermeasures at the real economic level. Nevertheless, there is growing unease on the US side about exchange rate developments. US Secretary of Commerce Ross recently threatened to impose punitive tariffs on countries that he suspects of engaging in currency manipulation in order to give their export trade an unfair competitive edge over US rivals. This might not sound particularly exciting at first, but in actual fact it is an expression of a US domestic power struggle. Until now there was never any doubt that the assessment of currency manipulation was a matter for the US Department of the Treasury,…

US consumers in particular are paying for Trump’s punitive tariffs

US President Donald Trump is boasting that the Chinese have to pay his punitive tariffs and are pumping billions of dollars into the state coffers. This representation is not correct. US importers can only pass on the tariffs, which they have to pay themselves, to the Chinese if they are granted corresponding discounts by the Chinese exporters. This might have been the US government’s objective; it has at least established the framework for this with the selection of product groups concerned. To date, the tariffs were imposed especially on products with relatively high elasticity of demand – processed food and animal products, for example, that are relatively easy to substitute, or numerous intermediate products. Consumer goods where there are few alternatives available to US consumers, such as clothing or toys, were largely spared. However, we can see from several current studies carried out in the US that it was not…

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