The beginning of the new week, like the end of the previous week, is marked by the depreciation of the American currency. On Friday, the argument for USD sales was worse than expected inflation data. Meanwhile, the main pretext today may be China`s deliberations on the sale of US government bonds.
From the end of last week there will be new higher tariffs on Chinese products (worth USD 200 billion), which go to the United States. China, despite warnings from the US, will respond in retaliation to the actions of the Americans. Already today on the website of the Chinese Ministry of Finance there is a statement about the list of products to which China will impose tariffs. The date of their entry into force was set for June 1. The total number of products subject to customs duties is to reach over five thousand, of which the largest part will be imposed on customs duties in the amount of 25%. This is the same rate as the duties imposed by the United States.
What's more, China is considering stopping US debt purchases, and maybe later selling as a revenge for customs. There would be nothing extraordinary about this, if not for the fact that China is the largest foreign creditor of the United States. According to data from February this year China has almost one third of all US debt held by foreign states. Speaking of 1.13 trillion dollars.
If such a significant demand disappeared from the US bond market or if such a gigantic supply appeared on it, then the yields on debt could rise sharply. At that time, the Americans would have to pay more interest to investors, which would put additional pressure on them. In such a scenario, the US dollar may theoretically lose. Not only that bond yields could rise, and USD could follow them, then even dollars obtained from the sale of debt could be converted into other currencies. Currently, these are only rumors, but in the event of the escalation of the trade war, all tricks are allowed.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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