Dubai: Escalating trade tensions between the world’s two largest economies coupled with a strengthening US dollar are expected to take centre stage when global financial markets reopen on Monday.
Analysts said the dollar is likely to continue advancing, having gained 6 per cent in the past two months alone, especially after the European Central Bank (ECB) signalled at its latest meeting that interest rate hikes are still distant.
“The stronger dollar will be a contender to take centre stage following the conclusion of the ECB policy meeting last Thursday,” said Jameel Ahmad, global head of currency strategy and market research at FXTM. “Investors have been provided with a blunt reminder of how far ahead of the line the Federal Reserve is compared to its major counterparts regarding monetary policy.”
The language from the ECB on interest rates was in stark contrast to the US Federal Reserve, which just a day earlier hiked interest rates by 25 basis points as it continues to reverse its quantitative easing measures taken in response to the 2008 financial crisis.
FXTM’s Ahmad said that such moves will create woes for emerging market currencies not pegged to the dollar.
“This is likely to lead to further investor temptation into the dollar … and I wouldn’t be surprised if the greenback continues to hit new 2018 highs over the upcoming period,” Ahmad said.
In the foreign exchange markets, the Turkish lira is also expected to be “very volatile” over the next few trading sessions ahead of the June 24 elections in which President Recep Tayyip Erdogan is aiming for a second term, he said.
In equities, analysts said markets may get wobbly after US President Donald Trump said he will push ahead with tariffs on $50 billion (Dh183.5 billion) worth of Chinese goods. US stocks are already showing signs of concerns, having dropped on Friday after Trump’s announcement.
China also amped up these tensions as it responded saying it plans to impose tariffs on $50 billion worth of American imports.
“With the announcement of the tariffs, there’s a real risk that we can see a continued increased escalation,” said Robin Anderson, senior economist at Principal Global Investors in Iowa.
And that escalation is exactly what has economists worried.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, told Gulf News in April that a key concern with tariffs is the pace of escalation. She said that if protectionism measures continue to rise, that could impact global demand in trade.
— With additional inputs from Reuters