{"id":2950,"date":"2025-07-31T18:08:39","date_gmt":"2025-07-31T18:08:39","guid":{"rendered":"https:\/\/trusteconomics.eu\/?p=2950"},"modified":"2025-07-31T18:08:39","modified_gmt":"2025-07-31T18:08:39","slug":"the-us-china-currency-war-is-putting-the-final-nail-in-the-coffin-of-the-global-economy","status":"publish","type":"post","link":"https:\/\/trusteconomics.eu\/index.php\/2025\/07\/31\/the-us-china-currency-war-is-putting-the-final-nail-in-the-coffin-of-the-global-economy\/","title":{"rendered":"The US-China currency war is putting the final nail in the coffin of the global economy"},"content":{"rendered":"\r\n\r\nThe U.S. economy has not faced such a tariff regime in nearly 80 years. It is in a situation without historical precedent and therefore without the possibility of \u201cready-made recipes.\u201d Given the absence of recent historical precedent, the Federal Reserve is waiting for more evidence that consumer prices are not rising sharply due to tariffs before proceeding with interest rate cuts.\r\n\r\n \r\n\r\nThere is another reason for caution in these uncertain times: the highly unusual behavior of the U.S. dollar in the face of an impending currency war with China over the yuan. Many economists \u2014 including Stephen Miran, chairman of the President\u2019s Council of Economic Advisors \u2014 expected the dollar to strengthen when President Donald Trump implemented the retaliatory tariffs on April 2.\r\n\r\n \r\n\r\nIn a study published in November, Miran wrote that the currency was \u201cmore likely to strengthen\u201d than weaken as the U.S. trade balance with its partners improved \u2014 as it did during Trump\u2019s first trade war in 2018-2019.\r\n\r\n \r\n\r\nCurrency hedging and the absence of inflationary pressures<\/strong>\r\n\r\n \r\n\r\nTreasury Secretary Scott Bessent expressed the same view during congressional hearings. The so-called \u201ccurrency offset\u201d was a crucial parameter for his position that the new tariffs would not be fully passed on to consumers and would not trigger inflationary pressures.\r\n\r\n \r\n\r\nIt should be noted that currency hedging is a strategy used to minimize the risk arising from currency fluctuations. In essence, it is a method by which a company or investor \u201clocks in\u201d a specific exchange rate for a future transaction, thus protecting itself from unpredictable market movements.\r\n\r\n \r\n\r\nImagine a business in the EU that expects a payment in dollars from a customer in the US in three months. If the value of the dollar falls significantly against the euro by then, the European company will receive fewer euros than it had originally agreed to, reducing its profits. Currency hedging would allow it to avoid this risk.\r\n\r\n \r\n\r\nIt seems to be serving Trump’s seemingly contradictory goal of maintaining the US currency as a global reserve currency while reducing its value to address US trade deficits that triggered the infamous Triffin dilemma. This is the situation when the possession of a reserve currency by a country with high budget deficits and debt “suffocates” its productive base.\r\n\r\n
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\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Table with currency yields against USD<\/figcaption><\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nSurprisingly, the dollar has weakened \u2014 and the reasons for this are still the subject of heated debate among economists.\r\n\r\n \r\n\r\nThe U.S. Dollar Index has fallen 6.8% since just before the \u201cLiberation Day\u201d tariffs were announced on April 2 and has fallen about 10.4% in total in 2025, marking its worst year-to-date performance in at least 25 years. The median forecast of analysts surveyed by Bloomberg (July 22) is for the dollar to continue to weaken over the next 12 months.\r\n\r\n \r\n\r\nHolding other things constant, one would expect the pressure on consumer prices to be even greater than the tariffs alone suggest. Economists have found in the past that, for a given change in the exchange rate of developed countries, the long-term \u201cpass-through\u201d to import prices is as much as 60% (for the US in particular, it is estimated to be around 40%). However, this pass-through depends on the economic context \u2013 and all else is never equal.\r\n\r\n \r\n\r\nSo far, inflation measurements have been subdued, either because the transfer will take time, or because retailers absorb the cost through lower profit margins, or because pessimistic forecasts were wrong. Probably all three \u2013 and that means that the Cassandras who predicted an inflationary tsunami (of the largest international media outlets included).\r\n\r\n
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\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0US tariffs are deflationary for China<\/figcaption><\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nGiven all this, it is wise to wait for \u201cthe data to speak\u201d \u2014 just as Federal Reserve Chairman Jerome Powell plans to do. This angers Trump, who insists he can achieve both increased tariff revenue and immediate interest rate cuts at the same time. To do so, he is putting intense public pressure on the independent central bank and its outgoing chairman.\r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nWhy is the dollar weakening?<\/strong>\r\n\r\n \r\n\r\nIn April, many analysts interpreted the dollar\u2019s decline as a sign of cracks in the so-called \u201cexcessive monetary privilege\u201d of the United States. The idea is that the United States, with the deepest and most liquid asset markets in the world, has enjoyed a privileged position in the global financial system.\r\n\r\n \r\n\r\nThis special position has meant a slightly stronger currency and lower borrowing costs than they would otherwise have. When the dollar weakened alongside rising borrowing costs after April 2, commentators and academics argued that disorganized trade policymaking was tarnishing America\u2019s \u201cbrand\u201d internationally.\r\n\r\n \r\n\r\nAnother related argument has to do with capital flows. At the time of the tariff announcement, investors worldwide were heavily exposed to U.S. stocks, particularly the so-called Magnificent 7 (the top technology stocks).\r\nFrom 2020 to March 2025, the S&P 500 outperformed other advanced economies by more than 2:1.\r\n\r\n \r\n\r\nGlobal investors invested heavily in the U.S. market, often without hedging against currency risk. The hasty exit from these positions created a wave of outflows with significant macroeconomic impact.\r\n\r\n \r\n\r\nAs plausible as these theories may seem for the tumultuous week in April, it is far from clear that they remain sufficient to bet against the dollar in the long term. As for \u201cexcessive privilege,\u201d perhaps America\u2019s image has been tarnished by Trump\u2019s threats to Fed independence \u2014 but these are subtle variations: from \u201cextraordinarily special\u201d to simply \u201cvery special.\u201d\r\n\r\n \r\n\r\nIn practice, there is no truly viable alternative to US debt and currency: Europe lacks market depth, China lacks transparency, and Bitcoin is extremely volatile. The dollar will necessarily coexist with competing currencies in a multipolar monetary regime.\r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nCurrency War and the Threat of Sanctions<\/strong>\r\n\r\n \r\n\r\nAs global supply chains and trade continue to be restructured, Beijing is turning to another battleground: the Chinese yuan and its exchange rate against the U.S. dollar. Last month, Pan Gongsheng, head of China\u2019s central bank, reiterated the regime\u2019s interest in promoting the internationalization of the yuan, also known as the renminbi, at the Lujiazui Forum, a leading economic forum in Shanghai.\r\n\r\n \r\n\r\nThe dominance of currencies, especially in the digital world, will be the next focus of the U.S.-China trade war, according to Thanos Hondrogiannis, chief economist at Trust Economics (trusteconomics.eu). He noted that fear of sanctions has prompted the regime to try to expand the use of the yuan in an alternative cross-border payment system.\r\n\r\n \r\n\r\nIn support, U.S. Treasury Secretary Scott Bessent said Thursday 24\/7 that his delegation would stress the importance of stopping purchases of Russian and Iranian oil when meeting with Chinese officials next week in Sweden. He said in an interview with Fox Business that he believes the United States can move forward on such issues involving China, given that bilateral trade has now \u201cimproved.\u201d He made the remarks as senior U.S. and Chinese officials are set to meet on Monday and Tuesday (July 28-29) in Stockholm for a third round of trade talks.\r\n\r\n \r\n\r\nNow, China is worried \u2014 and not unfoundedly \u2014 about potential sanctions before its digital currencies gain traction and wider adoption, he said.\r\n\r\n \r\n\r\nThe Politicization of the Financial System<\/strong>\r\n\r\n \r\n\r\nIn a speech in Shanghai in June, China\u2019s central banker expressed concerns that \u201ctraditional cross-border payment infrastructures can easily be politicized, weaponized, and used as unilateral sanctions instruments\u201d as geopolitical tensions escalate. Thanos Hondrogiannis reports that \u201ceconomic sanctions and countermeasures will likely become a battleground for US-China competition in the next phase.\u201d\r\n\r\n \r\n\r\nThe United States may start by imposing sanctions on some Chinese entities and then expand the scope, eventually excluding China from the dollar system. The BRICS\u2019 \u201ctargeting of the dollar dethronement\u201d poses a real and credible threat to the United States, which is why Donald Trump is imposing additional tariffs on these countries.\r\n\r\n \r\n\r\nAt a Cabinet meeting on July 8, US President Donald Trump said that the BRICS wanted to \u201cdestroy the dollar so that another country could take over and be the standard.\u201d \u201cIf we lost the world position of the dollar, that would be like losing a war, a major world war,\u201d Trump said. \u201cWe would not be the same country anymore,\u201d he said, threatening an additional 10% tariff on those countries.\r\n\r\n \r\n\r\nEnding Tariff Wars<\/strong>\r\n\r\n \r\n\r\nTariffs were a foreign language to most people when Trump began imposing retaliatory tariffs. Now, the world has accepted a minimum tariff of 10%, marking the triumph of his policy.\r\n\r\n \r\n\r\nThe final tariff numbers are not as important as establishing a new global order for international trade. A decentralized trading system that incentivizes capital flows into the United States was the bet of this trade policy. And that is something that was missing from the WTO (World Trade Organization).\r\n\r\n \r\n\r\nAt the start of Trump\u2019s second term, the average tariff rate imposed by the United States was 3.4%, according to the World Trade Organization.\r\n\r\n \r\n\r\nThe global trading system has been characterized by low tariffs on exports to the United States, as well as significantly higher tariff rates or non-tariff trade barriers imposed by other countries.\r\n\r\n \r\n\r\nFor now, the US administration has extended the deadline for tariff negotiations from July 9 to August 1, with no further extensions. In the meantime, the base tariff rates remain at 10%.\r\n\r\n \r\n\r\nTrump has since issued tariff letters to dozens of countries, setting their tariffs at between 20% and 50%. This method is described as the \u201cblind box\u201d method, meaning that the tariff rate is only revealed upon receipt of the letter \u2013 such an approach is \u201cvery effective\u201d at \u201cthe lowest cost\u201d.\r\n\r\n \r\n\r\nTrump is sending a message that he is the one making the decisions and that other countries will be forced to comply \u2013 including China.\r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nThe New Cold War<\/strong>\r\n\r\n \r\n\r\nTrust Economics sees the trade negotiations as a prelude to a new Cold War, with the world divided into two camps: one led by the United States and the other by China. It noted that in the US-UK trade framework agreement, the two countries agreed to strengthen mutual economic security by addressing \u201cun-tradeable policies of third countries.\u201d Although China is not named, it is known for protecting its state-owned enterprises with industrial policies and dumping its excess capacity on the global market.\r\n\r\n \r\n\r\nOngoing discussions include the scenario of China exchanging its rare earths for American semiconductors and opening up its services sector, particularly banking and investment, to the United States. China has had a near monopoly on rare earths for decades, largely due to predatory practices that have driven foreign companies out of the sector.\r\n\r\n \r\n\r\nThe United States has a trade surplus with China in services. Last year, China\u2019s gigantic goods trade surplus of nearly $296 billion with the United States was offset by a services trade deficit of about $33 billion, according to the U.S. Census Bureau.\r\n\r\n \r\n\r\nBeijing is exploring further opening up the services sector as a bargaining chip in its trade negotiations. China\u2019s opening up is a beneficial strategy for Beijing as well, according to Lian. He wrote in his article that greater financial market openness would increase China\u2019s \u201cstickiness\u201d and make it \u201ctoo big to sanction.\u201d\r\n\r\n \r\n\r\nThe tariff battle is expected to escalate into a currency war because the United States has an outsized vulnerability: its nearly $37 trillion debt.\r\n\r\n \r\n\r\nDefending the dollar\u2019s supremacy<\/strong>\r\n\r\n \r\n\r\nCurrently, the dollar\u2019s status as the world\u2019s reserve currency and the primary currency used in international trade allows the United States to borrow more at lower interest rates. The level of U.S. debt is now so high that annual interest payments exceed the nation\u2019s defense spending.\r\n\r\n \r\n\r\nIn fiscal year 2024, which ended Sept. 30, 2024, the United States spent $882 billion on interest on its debt, compared with $874 billion on defense spending, according to the Treasury Department. That makes the role of the U.S. dollar even more critical, because any devaluation or significant uncertainty about the currency could lead to a default.\r\n\r\n \r\n\r\nChina holds $756 billion worth of U.S. Treasuries, according to the Treasury Department, which collects the data through U.S.-based brokers. Hong Kong has an additional $253 billion. But China is the world\u2019s largest holder of U.S. Treasuries\u2014surpassing Japan\u2019s $1.1 trillion\u2014because Beijing is buying undisclosed amounts through European institutions.\r\n\r\n \r\n\r\nAn April report by J.P. Morgan Chase said that, contrary to popular belief, \u201cChina has not reduced its holdings of U.S. Treasuries; the holdings are simply more covert,\u201d according to a translation of the original Chinese text. So Beijing could potentially sell U.S. Treasuries at a critical time when the market is losing confidence in the dollar and force interest rates to rise if no buyers can absorb China\u2019s \u201cdumping.\u201d\r\n\r\n \r\n\r\nIf the dollar\u2019s status as a reserve currency is shaken, it could also lead to a weakening of Washington\u2019s borrowing capacity. The CCP knows this and has been working for years to replace the US dollar with the yuan. In 2015, Beijing launched its own Cross-border Interbank Payment System (CIPS), for transactions in Chinese yuan. While CIPS is not comparable to the US dollar-based global payments system \u2013 called the Clearing House Interbank Payment System (CHIPS) \u2013 in terms of scale and global reach, it is growing.\r\n\r\n \r\n\r\nThe Payment System and the Digital Yuan<\/strong>\r\n\r\n \r\n\r\nEvery month, the volume of financial transactions through CIPS is about 700 billion yuan, almost double the amount in 2021, according to the Peterson Institute for International Economics (PIIE). That scale is still insignificant compared to the $1.8 trillion in daily transactions, or more than $50 trillion in monthly transactions, through CHIPS, according to its official website. And CIPS still relies heavily on the U.S.-led SWIFT, or Society for Worldwide Interbank Financial Telecommunication, to send payment messages, according to the PIIE.\r\n\r\n \r\n\r\nThe CCP has also noted that the world of digital currencies offers a new arena for competition, and in 2022, China introduced its own digital yuan.\r\n\r\n \r\n\r\nThe current situation calls for the United States to find more places outside of China to hold U.S. debt and defend its reserve currency status in both the physical and virtual worlds. He pointed out that a type of cryptocurrency referred to as \u201cstablecoins\u201d is a \u201ccreative\u201d answer to the challenge. \u201cStablecoins can theoretically allow unlimited purchases of U.S. Treasury bonds,\u201d he said. \u201cThe sky is the limit.\u201d\r\n\r\n \r\n\r\nStablecoins are digital money that is pegged to a fiat currency on a one-to-one basis. Issuers guarantee holders that they can convert the money back at any time. Therefore, stablecoins can provide the decentralization and financial efficiency of digital money, combined with the stability of a traditional fiat currency.\r\n\r\n \r\n\r\nSo far, 98% of stablecoins are pegged to the dollar, and 80% are issued outside the United States, according to the Atlantic Council, a Washington-based think tank. Holders can bypass banks and even their country\u2019s unreliable currencies. For example, a coffee shop in Argentina or a small business owner in Vietnam can transact in digital currencies that are pegged directly to the dollar. Last year, stablecoin transaction volume reached $27.6 trillion, 7.7% more than the combined transaction volume of Visa and Mastercard, according to cryptocurrency exchange CEX.io.\r\n\r\n
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Stablecoin Map<\/figcaption><\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nHolding US Debt and Stablecoins<\/strong>\r\n\r\n \r\n\r\nStablecoin issuers generate revenue by investing the dollars they receive in exchange for digital tokens, and they have already emerged as significant holders of US debt. They hold more than $120 billion in Treasury bills and are poised to hold more than $1 trillion in Treasury bonds by 2028, according to an April report from the Treasury Department\u2019s Advisory Committee on Debt. That means stablecoin issuers could become the largest holders of Treasury bills, surpassing China and Japan.\r\n\r\n \r\n\r\nTwo months ago, Hong Kong passed legislation on stablecoins, although it has yet to issue its own stablecoins. Chinese giants such as Ant Group and JD.com, Inc. have said they will submit applications to become issuers once the legislation goes into effect on August 1, according to Chinese state media. The U.S. Congress on July 17 passed a landmark cryptocurrency bill that establishes a regulatory framework for stablecoin issuers.\r\n\r\n \r\n\r\nThe GENIUS Act, signed into law the following day, requires stablecoin issuers to back their digital tokens with either cash or U.S. Treasury bonds. Treasury Secretary Scott Bessent posted on the X platform in June that \u201cstablecoins can enhance the supremacy of the dollar.\u201d\r\n\r\n \r\n\r\nBy leveraging stablecoins, the dollar has extended its dominance from the physical to the virtual world and has found more buyers of US debt at a collective level comparable to China and Japan. It\u2019s a brilliant strategy, and time will tell how effective it will be\u2026\r\n\r\n","protected":false},"excerpt":{"rendered":"

The U.S. economy has not faced such a tariff regime in nearly 80 years. It is in a situation without historical precedent and therefore without the possibility of \u201cready-made recipes.\u201d Given the absence of recent historical precedent, the Federal Reserve is waiting for more evidence that consumer prices are not rising sharply due to tariffs … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[105,200,59,106],"tags":[52,83,640,593,572,693,997,747,873,141,292],"class_list":["post-2950","post","type-post","status-publish","format-standard","hentry","category-developed-economies","category-developing-economies","category-proposed-fiscal-policies","category-us","tag-china","tag-dollar","tag-donald-trump","tag-global-economy","tag-russia","tag-sanctions","tag-stablecoins","tag-tariffs","tag-trade-deficit","tag-usa","tag-yuan"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2950","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/comments?post=2950"}],"version-history":[{"count":1,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2950\/revisions"}],"predecessor-version":[{"id":2951,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2950\/revisions\/2951"}],"wp:attachment":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/media?parent=2950"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/categories?post=2950"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/tags?post=2950"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}