Could the next battle front be in currency wars against countries?

The euro rise also coincided with a fresh leg down on the dollar, with the euro zone

WITH tariff warriors on the rampage, tit-for-tat fights and more frequent growth downgrades, there seems to be nowhere to hide.

Global harmony and stability, international relationships, business and market confidence have been shaken; supply chains are yanked out of place and fears of recession have mounted.

Could the next battle front be in currency wars against countries, as the US Commerce Department proposes to impose countervailing duties on those deemed to have devalued their currencies?

Against the bitter US-China trade war, the threatened imposition of tariffs on Mexico, the top US trading partner, has been “indefinitely suspended” on an immigration control deal.

There could be a next-in-line for tariffs, while the Federal Reserve’s readiness for a possible rate cut indicates its serious concern over deteriorating data.

“The slowing global economy will be dampened further, but unlikely to tip into recession. Major central banks have pledged to maintain supportive interest rates to mitigate the elevated risks,’’ said Socio Economic Research Center executive director Lee Heng Guie.

Non-farm payrolls in May rose 75,000 against an estimated 185,000; March numbers were revised downwards from 189,000 to 153,000, those for April went to 224,000 from 263,000.

Weakness has spread from goods to services and from healthcare to retail, while manufacturing added only 3,000 jobs in the past four months.

Caution on the further impact of the trade war and slowing global growth had affected hiring.

The ammunition that central banks have, especially in the form of “silver bullets” to fight the downturn, have become “fewer and fewer”.

With short term rates at 2.25% to 2.5%, the Fed may not have much room to fight the next slowdown which may need to be salvaged by a few rate cuts.

A temporary salve to the pain, should a drastic slowdown occur, may be a restart of quantitative easing (QE), the Fed’s large-scale bond buying stimulus which floods markets with money and is being shrunk now, even amid misgivings of further asset bubble creation.

“Negative rates have not yet been attempted by the Fed. QE, which may be used by reserve currency economies, seems to work quite well for those highly indebted,’’ said Inter-Pacific Securities head of research Pong Teng Siew.

Increased money supply from QE lowers borrowing rates, helping those highly indebted countries; it may reduce the value of the currency,

hence reserve currency economies such as the United States, the eurozone and Japan, with stronger currencies, can undertake QE.

However, a lesson from the European Central Bank is that negative rates kept for too long will lose their effectiveness; currently, they appear unable to pull Europe out of its slump.

Negative rates are charged on depositories who pay to keep their money in the bank as an incentive for banks to lend more.

Could Asia be spared in the event of recession in the advanced countries?

To some extent, Asian countries have been relying less on exports, diversifying into consumption and services.

Asia, with its emerging wealth and population, may be able to cushion some of the recessionary effects, if any, from advanced economies, said Areca Capital CEO Danny Wong.

With warnings of further downgrades to global growth, the World Bank and International Monetary Fund (IMF) have pointed squarely at trade wars, among other factors, as creating the drop in world trade and potentially, a fall in investments.

Growing pessimism over the situation is echoed by former China commerce minister Chen Deming who said that “China will have to endure that, the US will have to endure, and the whole world will have to endure that, and the global economy will go backward”.

IMF managing director Christine Lagarde warns against “one more tariff here, one more threat there, one more negotiation that has not started”.

The IMF still expects global growth at 3.3% at the end of 2019, but trade wars can, among other factors, derail the expected upturn at 3.6% next year.

The World Bank, however, only expects the world economy to grow 2.6% this year, downgrading every major region, with growth estimates declining since the middle of last year.

Momentum is delicate and can be disrupted by further escalation in trade disputes, renewed financial turmoil in emerging economies and a more abrupt slowdown in developed economies than is currently projected.

The World Bank highlighted the decade-low in global trade growth and “tumble in business confidence”, pointing to subdued investment and rising debt levels in emerging economies.

Trade wars have shaved off close to one percentage point in global growth, a situation that has “gotten very bad”, said the Organisation for Economic Co-operation and Development secretary-general Angel Gurria in a Bloomberg Television interview.

Columnist Yap Leng Kuen notes that uncertainty is the enemy of growth.

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