Home About Archives RSS Feed

The Independent Investor: Currencies & Trade Wars

By Bill Schmick
iBerkshires columnist
What's up with the dollar? The greenback is strengthening and is having its best quarter since 2016 against an array of foreign currencies. Is this an accident, or is it something far more dangerous?
 
Economists will tell you that the Trump tariff crusade is responsible. New trade barriers, which the president is suggesting, would usually lead to higher prices at home, according to economic doctrine. Products we import would cost more, whether we are talking about steel, automobiles, or baseball caps.
 
As prices increase, so should the U.S. inflation rate. As inflation rises, bondholders will demand higher interest rates to keep up with inflation. In turn, higher interest rates would normally lead to a stronger dollar. In the real world, this explanation is not so cut and dried.
 
There could be any number of macro scenarios that I could spin, which could alter the dollar's rise. For example, the Fed (which controls U.S. interest rates) could decide not to raise interest rates for other reasons. The impact of tariffs might also end up being so minor that prices barely budge. In other cases, breakthroughs in technology (such as oil and gas fracking) or in a manufacturing process could lower the cost of certain products even while others are going up due to the tariffs.
 
The dollar's strength or weakness will also depend on what is happening overseas. The economic conditions of other nations will impact their own currencies relative to ours.  In many countries, the exchange rate is not determined by market forces, as is the greenback. In many cases, currencies are controlled by a central government. A currency could be "pegged" to the U.S. dollar, or to a basket of currencies. It could rise and fall in a pre-set range pre-determined by the government's central bank. Governments can also control how much of any currency their citizens may own.  
 
In a trade war, like Donald Trump appears to be waging, a country can use its currency to countervail the price impact of tariffs on their exports. Let's say you are a Chinese manufacturer of Major League baseball caps. You compete with one of two American companies. They may make a better product, but also charge more for it, let's say 10 percent.
 
So, being a great patriot and baseball fan, the president decides to slap a 10 percent tariff on all baseball caps imported from China. Now, the Chinese manufacturer has neither a price or quality advantage. His sales suffer and America "wins." However, the Chinese government could alleviate the situation by allowing their currency to devalue by that 10 percent. In this case, the cost to the American importer of Chinese baseball hats remains the same, because it now costs him 10 percent less (in U.S. dollars) to buy the hats. 
 
Fast forward to today. The latest salvo in Trump's trade war is to threaten to raise the amount of Chinese goods taxed by the U.S. to $450 billion. That would mean that tariffs would be applied to nearly all the $505 billion in goods that China exported to the U.S. last year. That would be a real blow to the Chinese economy. To soften that blow, China could decide to let their currency, the yuan, weaken to the point that the impact of tariffs would be erased.
 
In the past two weeks, the yuan has fallen three percent against the dollar. It is still up about 5 percent against the greenback over the last year, but that can easily change. Is the Chinese government deliberately causing the decline?
 
If they are, you can't prove it. Going back to the economic models, one could argue that the tariffs Trump is planning to impose would damage the Chinese economy, slow growth, and weaken their currency. The recent decline could only reflect that fear among currency traders.
 
Whatever the case, China is not the only player that may be tempted to play this game. All of Europe and Asia will be hurt by American tariffs. It makes economic and political sense for nations to protect their own fortunes and those of their people in the event of a trade war. Some would argue that it is their duty to do so. 
 
Since all is fair in love and war, deliberately weakening a nation's currency in relation to the dollar in response to tariffs could be a smart move. Some might even argue it is the patriotic thing to do.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
0 Comments
     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Lanesborough Again Seeking Interest of Private Ambulance Service
Resolution Endorsing Gun Range Goes to North Adams City Council
Mount Greylock Committee Hears Concerns About Disparities at Elementary Schools
Berkshire YMCA Honoring Those 'Changing Lives After 55'
Biz Briefs: Humane Society Opening Second Catwalk Boutique
PHS Graduates Honored For Scoring Well On AP Exams
Cheshire Seeks Grant Funds to Extend Wells Road Sidewalk
North Adams Historical Commission Wants Funds to Preserve Gatehouse
Williams Field Hockey Comes Back to Win at Bates
Democrats Open Pittsfield HQ For November's Election Push

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (268)
Independent Investor (366)
Archives:
September 2018 (2)
August 2018 (9)
July 2018 (2)
June 2018 (8)
May 2018 (8)
April 2018 (7)
March 2018 (6)
February 2018 (7)
January 2018 (7)
December 2017 (8)
November 2017 (5)
October 2017 (5)
Tags:
Currency Europe Selloff Stimulus Interest Rates Banks Markets Housing Metals Oil Commodities Jobs Retirement Election Bailout Stock Market Pullback Economy Recession Stocks Debt Ceiling Debt Federal Reserve Fiscal Cliff Wall Street Energy Crisis Deficit Euro Taxes Greece Rally Japan Europe Congress
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Record Highs and More to Come?
The Independent Investor: Dogs and Their Cars
@theMarket: September's stock market
The Independent Investor: How Prepared Are You to Sell Your Company?
@theMarket: Record Highs Coming Up?
The Independent Investor: Should You Bury Yourself?
The Independent Investor: Turmoil in Turkey
@theMarket: Will Stocks Break Out or Break Down?
The Independent Investor: Should You Pay Down Your Mortgage?
@theMarket: Stocks Set for a Volatile August