The US-China trade war could send shockwaves through the Australian economy.
- AUD/USD surges almost 1.4% to near 0.6050 as the US Dollar faces an intense sell-off.
- The US-China trade war could send shockwaves through the Australian economy.
- Fed Kashkari expects Trump's tariffs to increase inflation and weigh on GDP growth.
The AUD/USD pair is rallying to near 0.6050 during North American trading hours on Wednesday. The Aussie pair strengthens as the US Dollar (USD) slides sharply amid fears that deteriorating trade relations between the United States (US) and China could push the economy into a recession.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, tumbles to near 102.00. The S&P 500 opens on a slightly positive note, exhibiting an increase in the risk-appetite of investors.
The tariff war between the US and China has escalated as the latter has increased counter-tariffs to 84%, matching reciprocal levies imposed on Beijing by President Donald Trump on Tuesday. Such a scenario will force US importers to look for other nations to buy substitutes for Chinese goods. Market participants expect the event to be inflationary as the purchase of similar goods from other nations won’t be cost-effective, given the competitive advantage of China in manufacturing due to lower labor costs.
Market experts also believe that the inflationary impact of the US-China trade war could also lead to a recession in the US. During North American hours, Minneapolis Federal Reserve (Fed) Bank President Neel Kashkari said, “Near-term inflation will climb, purchasing power will go down, investment will likely be lower, and GDP will be smaller due to tariffs.”
Going forward, investors will focus on the Federal Open Market Committee (FOMC) minutes of the March meeting, which will be published at 18:00 GMT.
Though investors have underpinned the Australian Dollar (AUD) against the US Dollar, its outlook remains weak as potential economic shocks due to the US-China trade war. The Australian economy is expected to be one of the major victims of the trade war, given its significant reliance on exports to China.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
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