US dollar will suffer if US-China trade tension escalates

World
Europe

00:39

Global investment banks are warning that a full-scale trade war with China would plunge the US into recession and weaken the US dollar.

The US dollar fell against the Japanese yen and Swiss franc Tuesday on US President Donald Trump's threats of additional tariffs on China. The Japanese yen climbed 0.7 percent against the dollar to 109.795 yen, its highest level in a week.

00:25

Another perceived safe haven, the Swiss franc, also got a boost from the reports. The franc was up as much as 0.3 percent against the US dollar to 0.9917 francs. Moreover, the Australian and Canadian dollars both weakened to one-year lows on Tuesday.

Zach Pandl, an analyst from the global investment banking Goldman Sachs, said that lessons from US trade protectionism dating back to the 1970s show that the US dollar always suffers in the end. That's because the markets will speculate that American officials want a weaker currency.

Meanwhile, Deutsche Bank chief economist Torsten Slok noted that the policy uncertainties and the inflation outlook will contribute most to the dollar's decline. The chief economist also forecast that investors may lose confidence because they don't understand where American trade policy is going and what the end game will be.