Macroscope | How the euro could become collateral damage in the US-China trade war as the yuan comes into focus

Neal Kimberley says 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

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President of the European Central Bank Mario Draghi has warned of risks surrounding euro-zone growth. An economic slowdown in China would add to the EU’s economic problems and to downward pressure on the euro. Photo: EPA

Published: 4:00pm, 29 Jan 2019Updated: 10:20pm, 29 Jan 2019

A slower pace of economic expansion in China is one of the drivers of dimmer prospects for the euro-zone economy. Not China’s problem? Maybe not, but if the euro comes under sustained pressure in the currency markets, it will complicate Beijing’s efforts to keep the yuan stable.

With China already embroiled in trade negotiations with the United States that include discussions about the value of the yuan, Beijing might rationally conclude some degree of yuan strength will be needed to assuage US concerns. If so, an accompanying appreciation of the yuan versus the euro would be unhelpful, leaving China’s exporters with a loss of competitive advantage on two major fronts at the same time.

“The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties,” European Central Bank President Mario Draghi said on Thursday. That day, the currency market pushed the euro down to its lowest level versus the US dollar since December 14.

It remains to be seen whether euro weakness will re-emerge as a dominant currency market theme or whether the post-ECB price action was just a fleeting market reaction.

But no one should be in any doubt that the outlook for the euro-zone economy has dimmed and that part of the problem lies in the fact that a slowing China may have less appetite than before for euro-zone goods – and most notably German ones.

Workers produce gloves at a factory in Luannan county in north China’s Hebei province in November 2018. Over 13 billion gloves for medical use are produced in the county and exported to markets including the US, Germany and France, but a strengthening yuan versus the euro in addition to the US dollar could hit demand for Chinese products. Photo: Xinhua

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.css-1m2rp1p{color:#34b8b5;}Macroscope | How the euro could become collateral damage in the US-China trade war as the yuan comes into focus

Macroscope | How the euro could become collateral damage in the US-China trade war as the yuan comes into focus