Just as US President Donald Trump calls a truce on the trade war with China, he may be about to open a new battle front that will have far reaching consequences for Australia.
There's growing speculation that Trump could direct the US Treasury to weaken the US dollar after he tweeted yesterday accusing China and Europe of manipulating their currencies to aid their economies, reported Bloomberg.
This isn't the first time that the US supreme leader (a proper salutation given his affection for autocrats and military parades) has jawboned the greenback, but this time could be different because he used words like "MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games".
Aussie dollar gets a Trump tweet boost
This is probably the reason why the Australian dollar has jumped to a more than two-month high of US70.3 cents. The Aussie has tried and failed to break decisively through the US70 cent mark over the past month, but that has changed with the Trump tweet and I think more gains for our dollar are likely.
This complicates the work of the Reserve Bank of Australia (RBA), which made the first back-to-back rate cut this month for the first time in seven years. Even then, the Aussie battler had refused to stay down.
A weaker dollar is generally better for our economy given that we are an exporting nation and is a net benefit for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as many of our large caps sell their goods and services overseas.
ASX stocks that will get squeezed from the exchange rate
These include the likes of global logistics group Brambles Limited (ASX: BXB), building materials company Boral Limited (ASX: BLD) and even our tech darling Afterpay Touch Group Ltd (ASX: APT), just to name a few.
The last time the US intervened in currency markets was in 2011 when it supported the greenback as part of a global effort following the tragic earthquake in Japan, which sent the yen soaring, reported Bloomberg.
The fact that Trumps tweet tirade came after his own administration cleared China of being a currency manipulator at the end of May has increased the probability of a currency war – and we all know how much Trump enjoys breaking convention.
The US and China has only recently called a time-out on the escalating trade tariff war during the G20 meeting in Japan over the weekend, which stoked risk appetite among investors.
We don't need to worry about the exchange rate just yet when the market is still on a liquidity high from falling interest rates, but the positive sentiment will likely sour if Trump goes head-to-head against China and Europe – and Australia will once again be caught in the crossfire.
