Synopsis:

Société Générale highlights the escalating trade conflict between the US and China as a key threat to global growth and dollar stability. With the US imposing tariffs that could decimate Chinese exports, the ripple effects across global trade and capital flows are profound, potentially leading to a notable USD decline.

Key Points:

• Impact on China:

  • US tariffs are set to significantly reduce Chinese exports to the US.

  • Beijing will likely respond with fiscal easing and policies to boost domestic demand, and attempts to redirect exports to other markets.

• Global Trade Consequences:

  • The US may struggle to substitute lost Chinese imports given its already tight labor market (unemployment at 4.2%).

  • Europe risks becoming a dumping ground for displaced Chinese goods, raising concerns over trade imbalances.

  • China’s shift toward domestic consumption remains uncertain without reigniting a construction boom.

• Dollar at Risk:

  • A prolonged trade war could choke global growth and prompt a sharp slowdown in capital flows to the US.

  • This capital flow reversal could trigger a significant decline in the USD, especially as global investors seek alternatives amid rising stagflation risks.

Conclusion:

SocGen warns that the US-China trade war, if prolonged, may usher in slower global growth and a substantial USD selloff. The dollar’s vulnerability lies not just in trade disruption, but in its reliance on capital inflows, which could falter if the trade war undercuts global investor confidence in US assets.