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Will Currency Wars Move the US Dollar after Trade War Concerns?

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Apr. 17 2018, Updated 2:12 p.m. ET

Trump’s tweet on currencies

Yesterday, Donald Trump accused Russia and China of devaluing their currencies. Trump tweeted that China and Russia are playing “the currency devaluation game as the U.S. keeps raising interest rates. Not acceptable!” Investors should note that this is a contradiction of the US Treasury, which had maintained that no major trading partners are manipulating their currencies.

With this tweet, the existing trade tensions between the United States, China, and Russia have stepped up. The Chinese yuan has appreciated ~10% in the last year while the Russian ruble has declined ~9%. Most of the decline in Russian currency is following the trade sanctions imposed by the United States on Russian entities on April 9.

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USD weaker

After this tweet, the US dollar index fell to its lowest level since March 26. Many market participants believe Trump’s tweet signaled that the United States wanted a weaker US dollar (UUP). Investors should note that the US Treasury Secretary commented at the World Economic Forum in Davos, Switzerland, on January 17 about the advantages of a weaker dollar. President Trump, in his speech the following day, however, helped stall the decline of the US dollar. The US dollar has mostly been on a downtrend since Trump’s election as US president. The Trump administration probably sees the lower dollar as a way to combat trade imbalances.

The dollar and gold

Many market participants have realized that the US economy could be in its late cycle and that its growth could be subdued compared to other economies. This could also pressure the US dollar. Any uncertainty in the market is good for gold. Moreover, since gold is denominated in the dollar, any weakness in the US dollar could reflect in higher gold prices. As a result, gold stocks (GDX) Goldcorp (GG), Randgold Resources (GOLD), Hecla Mining (HL), and Franco-Nevada (FNV) could benefit. These stocks are trading at $14.4, $80.7, $3.65, and $71.5, respectively.

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