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The foreign exchange market seems to think that the global trade war is not likely to break out in the near future. But as part of the currency's bet is at a record high, investors worry that the foreign exchange market may have some slack in risk.
The Trump administration has threatened to impose tariffs on Chinese imports, exacerbating concerns about the retaliation measures taken by the Chinese government, but the market is enjoying the many years of rising global economic growth, which only caused mild effects.
The group of 20 (G20) finance ministers meeting was held on Monday. Foreign exchange managers expect to see if the United States and other countries will be involved in diplomatic stalemate after Trump's announcement of tariffs on imported steel and aluminum, or whether the differences will intensify.
Foreign exchange markets do not enjoy trade disputes. In May 2016, when the former US President Obama imposed punitive tariffs on some of China's steel products, the US dollar index fell by over 2% in one month, while the US dollar increased by 2% against the yuan.
Similarly, the dollar fell by 6% after former president George W. Bush imposed tariffs on steel imports from the European Union in March 2002.
The latest trade conflict comes at a time when global currency volatility has fallen. In February, the volatility of the foreign exchange market suddenly rose sharply from many years' lows. According to a volatility index of Deutsche Bank, the volatility is still below the level in recent months.
This allows investors to look for early warning signals on the forthcoming volatility of the exchange rate in the foreign exchange market.
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