Could US-China tensions over Covid-19 reignite a trade war?

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US-China Tensions Over Covid-19 Raise Concerns of Trade War Resumption

Fears that the US-China dispute could reignite, this time focused on the novel coronavirus, have led to a significant surge in the US dollar against most major currencies. US President Donald Trump and Secretary of State Mike Pompeo have publicly assigned blame for the pandemic to China. Pompeo specifically stated that substantial evidence suggests the virus originated from a laboratory in Wuhan. This development prompts investors to assess the potential negative repercussions for global economic growth stemming from an escalation in US-China tensions.
Dollar Strengthens Amidst Global Growth Concerns

The US dollar saw a broad increase as investors reacted to the heightened geopolitical risks. This sentiment was exacerbated by the prospect of further tariffs and disruptions to supply chains, issues that are particularly concerning given the already fragile global growth expectations. The euro and sterling experienced declines against the dollar, reflecting this risk-averse trading environment. Similarly, the dollar gained ground against Scandinavian currencies, which are known to be sensitive to global trade dynamics.
Chinese Yuan Weakens to Six-Week Low

The most notable currency movement was the depreciation of the Chinese yuan, which fell to a six-week low against the US dollar in offshore trading. Analysts anticipate increased volatility in the dollar/yuan exchange rate, with a potential re-escalation of trade tensions threatening the relative stability previously observed in USD/CNY. This downturn in the yuan follows a bleak start to May, which was marked by negative US economic data and the looming threat of a renewed trade war.
Yen Remains a Safe Haven Amidst Volatility

In contrast to the broader trend, the Japanese yen was the sole major currency to appreciate against the US dollar. The yen, often considered a safe-haven asset, saw gains as market participants sought refuge from the increasing uncertainty. This movement underscores the yen's traditional role in times of global economic and political stress, even as other major currencies falter under the weight of renewed US-China friction.

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Could US-China tensions over Covid-19 reignite a trade war?

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