This morning, the Dow Jones is falling drastically. At the time of this writing, it is down over 700 points. The primary culprit is news out of China that the Red Dragon is devaluing its currency, the Yuan, against the U.S. Dollar.
For the first time in over a decade, the Chinese government devalued the Yuan below the 7-to-1 ratio it has shared with the USD. In the storm surrounding rising trade tensions, this news caused investor panic.
Predictably, President Trump did nothing to ease tensions when he unleashed a series of tweets in response to the change.
….used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices. Not anymore!
— Donald J. Trump (@realDonaldTrump) August 5, 2019
President Trump is, of course, wrong about who pays the bill for his tariffs. They ultimately punish the U.S. consumer more than anything else. And Wall Street is well aware of that.
As a result, investors have two main fears: first, Trump might feel that he is winning the war on China by using tariffs, and therefore increase his use thereof. More troublingly, he could respond to this Chinese decision in kind, moving to devalue the American dollar in a currency war that many, like Viraj Patel, Global Macro Strategist at Arkera, feel certain America would lose.
Risks of Trump intervening in FX markets have increased with China letting the yuan go. If this was an all out currency war – the US would hands down lose. Beijing far more advanced in playing the currency game + have bigger firepower. $JPY & gold win in an active global FX war https://t.co/4AQUBeDOai
— Viraj Patel (@VPatelFX) August 5, 2019
One thing is certain: a weaker economy almost certainly foretells a political defeat in 2020 for the President. So whatever decisions he makes regarding China, he had better be right.