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Dollar Sinks after Trump Hits China with Fresh Tariffs, Inciting Fed Cuts

Image © White House

- USD cracks, retreats from G10, after Trump tariffs China.

- Says 10% tariff to hit China's remaining exports next month.

- Comes after talks fail to yield progress toward a trade deal.

- Analysts says tariffs could incite more Fed interest rate cuts.

- After Fed neglected to indulge market pricing Wednesday.

The Pound-to-Dollar rate stabilised Thursday as the greenback capitulated near a 2019 high and sank to an intraday loss after President Donald Trump said he'll impose fresh tariffs on China's remaining exports to the U.S. in September.

President Trump wrote in a Twitter post that China's remaining $300 bn of exports to the U.S. will be subjected to a 10% tariff from September 01 after White House negotiators returned home "constructive talks" aimed at addressing the other side's "unfair" trading practices.

He says that after having backed out of previously-agreed commitments, China has now failed to deliver on a series of promises allegedly made to Trump  including one to buy more U.S. agricultural products and another to prevent the sale of Fentanyl, a synthetic opiate popular with some drug users, to American companies and individuals.

"The sharp shooters have given way to the heavy artillery. The trade war just got very hot, just as we thought things were improving. And just as the Fed had come up short as far as the market is concerned," says Mark Wilson, chief market analyst at Markets.com. "GBPUSD has held its ground and the euro also a touch firmer as the dollar has taken a knock. USDCNH has firmed up - a possible retaliation by China is to let the 7 handle be breached."

Above: Dollar Index at 15-minute intervals, alongside Pound-to-Dollar rate (yellow line, left axis).

Talks are still ongoing but tariffs are coming regardless as Trump attempts to pressure Chinese leaders into accepting terms of a deal that he's repeatedly said was almost done before China backed out of it earlier this year.  

The Dollar sank swiftly in response to the move, which could now compel the Federal Reserve (Fed) to deliver the steep interest rate cuts that President Trump has been arguing for in recent months, although it also risks hurting the U.S. economy and further blighting an already-hurt global economy.

"We’d say Trump walking out of the China trade talks and imposing that final batch of tariffs would be the signal to the Fed to get going on more rate cuts. Mr. Powell has all but said this is his trigger and in the absence of that gun firing, we are still in the old expansion cycle that is just getting a dose of sugar," says Barbara Rockefeller at RTS Forex, in a client note earlier on Thursday. 

Above: Dollar Index at daily intervals, alongside Pound-to-Dollar rate (yellow line, left axis).

Trump already imposed tariffs of up to 25% on some $250 bn of China's annual exports to the U.S., citing "unfair" trading practices that include the alleged theft of international property among other things.

The global economy slowed rapidly in the second half of 2018 as a result, although U.S. growth is also now decelerating. 

The Fed cut its cash rate 25 basis points to 2.25% late Wednesday, in line with expectations, but while providing guidance on the outlook for rates it neglected to indulge financial markets that had come to expect three cuts to reduce the Fed Funds rate to 1.75% by year-end.

Those additional cuts are were then seen by the market as less likely, which prompted a rally by the Dollar through much of Thursday. 

RTS' Rockefeller and a number of other analysts have said the U.S. central bank would have to cut much more than the market is looking for in order to sink the Dollar because interest rates elsewhere in the world are so low, economies are slow and slowing further, while other central banks are also expected to cut their own interest rates. 

Changes in rates are normally only made in response to movements in inflation, which is sensitive to growth, but impact currencies because of the push and pull influence they have over capital flows. Those flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency. 

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