FX traders may need to prepare for trade war
Nov 21 (Reuters) -FX traders may need to prepare for a trade war that curbs risk appetite and fuels demand for safe assets.
The worse any situation becomes the greater the attractiveness of the dollar which, as the global reserve currency, may be in high demand next year. But other presumed stores of safety could do well at the outset of a dispute.
Gold which has soared this year could add to its gains next year while the Swiss franc and yen could also benefit. Because the euro only plays second fiddle to the dollar in the rankings of reserve currencies, it may be fairly resilient unless stocks are hurt.
Should that happen a flight to safety could result in big and rapid dollar rise that significantly worsens the U.S. trade position that Donald Trump hopes to improve.
This potentially vicious circle mean this possible war looks hard to end before it has even started, and gives investors more cause to take a defensive stance.
It may be reason to think that tariffs won't happen, but given the U.S. leader's track record, that seems less likely. Should his administration choose to talk the dollar down then there could be a shift in the balance of global reserves which would boost both euro and yuan.
While the resulting weaker dollar might help the U.S., a potential loss of confidence in the currency could lead to very big movement, and is another reason to play it safe until the U.S. administration unveils its plans.
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Performance of safe assets https://tmsnrt.rs/3AS2bRG
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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