The Federal Reserve’s signalling of a rate cut is out of the ordinary, given the strength of US economic data. Are Trump’s trade war and tariffs doing that much damage to the US economy?

Japan’s Ministry of Finance is unlikely to act to prevent yen strength at a time when US President Donald Trump is accusing other countries of currency manipulation and complaining about Tokyo’s unfair relationship with Washington.

Has the Trump administration forgotten what happened after Richard Nixon pressured the Fed to pump up the economy in 1972? Also, Washington’s sanctions on other countries might turn them against the US financial system and the dollar.

Both the US dollar and the euro came under pressure after announcements by the Fed and European Central Bank chiefs that interest-rate cuts could be in the offing. If the Bank of Japan eases monetary policy further, the yen would be less attractive to currency investors.

China’s economic stimulus measures and the US Fed’s expected interest rate cut are likely to boost the Hang Seng Index, which in turn will support the Hong Kong dollar. Traders shorting the currency should rethink their strategy.

The US has started looking into alternative suppliers for the elements that power hi-tech. Beijing has already done the same with soy, and even a trade war resolution won’t stop this process.

The trade war is not just a strategy; Trump has a clear ideological enmity for trade deficits with any country, ally or rival. Conveniently, he rarely discusses those countries with whom the US enjoys a surplus in services.

The US’ recent escalations towards China are inflammatory – which is no accident. This suggests Washington is in no hurry to resolve the dispute, despite the economic toll it’s taking.

Tariffs may be here to stay because Donald Trump touts them as a general policy, not just a strategy for containing China. He also claims America’s beloved former presidents have supported tariffs – and he’s right.

Beijing is expected to tolerate a weaker yuan to help exporters offset the effect of higher US tariffs, although the yuan-to-dollar slide should be modest. Other currencies expected to be caught in the slipstream of trade war tensions include the yen and won.

Despite the worst quarterly results in 10 years, the Hong Kong economy is well-positioned for a rebound, especially if the trade war ends soon.

A weakened Korean won failed to stimulate its exports, meaning China’s recent growth is not in the sectors that need them, and that’s bad for Beijing’s other trading partners.

Washington and Beijing should know that a deal to end the trade war that increases Chinese reliance on US agriculture and US farmers’ dependence on Chinese markets is actually a lose-lose.

All at once, the markets for pork, other agricultural products and iron ore face distortions, and China might be willing to accept yuan appreciation to protect against the resulting commodity-related inflationary pressures.

With global growth predicted to slow, oil prices are expected to drop. However, disruptions to oil supply due to factors such as US sanctions on Iran and Venezuela, and rising electricity consumption in China, could cause a rise in prices.

While the US dollar is expected to weaken against the renminbi, its surprising strength against the euro and yen – the result of the Fed’s dovish turn and US Treasuries’ attractiveness viz-à-viz euro-zone and Japanese government papers – is bad news for Beijing.

The Bank of Japan, which has for years been trying to lift the economy out of a deflationary spiral, is unlikely to tolerate a rising yen and will act if it has to.

Expect China’s fiscal loosening and foreign investment reform to lift the yuan, especially as the effects of US stimulus from last year continue to wear off and a trade war settlement looms.

Major economies around the world, from Canada and Japan to the euro zone and Australia, reserve the right to let currencies depreciate if conditions weaken. China should not give up its right to do the same as part of any trade war settlement.

China may well accept a trade deal that specifically calls for a stronger yuan, while investors will look to buy more of the currency to fund increased holdings of A-shares.

It is one thing for Washington to call on Beijing to stabilise the yuan; quite another for it to insist on a strong Chinese currency when it relies on the weakness of its own dollar.

Despite Huawei’s leading role in the field, security concerns mean the US was certain to oppose the Chinese firm’s involvement in the roll-out of 5G tech – and Washington won’t be alone.

The US central bank’s position has softened and, with other currencies set to decline or hold firm, the yuan suddenly looks like a good bet to rise in value.

If China accedes to US pressure to strengthen the yuan against the dollar, it would also result in a rise in the yuan’s value vis-à-vis the euro. This would be unpalatable to Chinese exporters and a blow for the euro zone.

The timing seems right for a deal between Washington, where worries about Trump’s 2020 prospects are beginning to bite, and Beijing, which can do without the distraction of a trade war as it focuses on economic reform at home.

Despite the Chinese currency’s strong start in January, the uncertainty over US-China trade negotiations and the possibility that Chinese exporters were behind seasonal demand for the yuan should give investors pause.

Last week’s ‘flash crash’ that sent the yen soaring showed the currency’s draw when the jitters hit. Continuing market pessimism about the US and Chinese economies, and Japan’s own 2019 outlook, may add up to a good year for the yen.

It is prudent to have both concerns and confidence regarding China’s economy in 2019, as reforms and trade negotiations continue and policy options can still lift prospects.

Investors hoping for a quick resolution of the current stand-off over trade should brace themselves for a protracted conflict, as both countries compete to protect their technological edge and strategic interests.

The yuan might not weaken, despite China’s slowing economy and the trade war. Foreign exchange is relative. For the yuan to weaken, the market would also be making a judgment about the appeal of other currencies.