In his first few weeks in office, President Donald Trump has ordered the U.S. to withdraw from the Trans-Pacific Partnership and confirmed his intention to renegotiate the North American Free Trade Agreement. The consensus is that it won’t be long before he turns his focus to China, which he calls a currency manipulator.
China can weather such criticism, for now. But if Trump’s threats of trade sanctions and 45 percent tariffs become real, the economic impact for the world's second-biggest economy would be meaningful and could upend financial markets, potentially leading to a global recession. With economic growth already slowing and capital fleeing the nation, China's $11 trillion economy is operating from a position of weakness.
Here’s how it plays out: As the world’s dominant reserve currency, the dollar has no peer. International Monetary Fund data show that the greenback accounts for 63.3 percent of global foreign-exchange reserves, with the euro next at 20.3 percent, followed by the British pound and Japanese yen, both at 4.5 percent. That means that in times of crisis, the dollar benefits from global investors seeking a haven, even if the strife and the the uncertainty emanates from the U.S.
It’s possible that a trade war would drive flows into the dollar, putting upward pressure on the currency at the expense of other exchange rates. That would be on top of the natural demand for the greenback created by the anticipation of significant fiscal stimulus floated by the Trump administration and a faster pace of interest-rate increases by the Federal Reserve.
