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Forget the trade war – a currency war could send ASX shares tumbling

A bigger war is brewing on the horizon that could pose a more serious threat to our market than the Trump trade war engulfing the two largest economic powers in the world.

New tweets from US President Donald Trump have shifted economic tensions between China and the US to the currency market with Trump accusing not only the Chinese government of “currency manipulation” but also the European Union.

Disruption to the US$5.1 trillion a day currency market is likely to pose as big a threat, if not bigger, to our S&P/ASX 200 (Index:^AXJO) (ASX:XJO) than a global trade war.

This new global risk comes as the Chinese yuan tumbled to a one-year low and as the European Central Bank (ECB) bristled at Trump’s attempts to jawbone the US dollar lower.

Make no mistake, the global currency war is upon us even as the global trade war is only just unfolding.

No one wants a strong currency as that will make life more difficult for their exporters to compete, particularly as global tariffs are rising.

A currency war will hit a wide range of assets hard – from stocks to commodities, according to a report on Bloomberg.

You only need to look at the shock devaluation of the yuan in 2015 to see the scope of the potential fallout with risk assets the likely casualties.

While Trump has managed to talk down the US dollar, the weakness won’t last as a trade and currency war will probably trigger panic buying of the greenback. No one, not even Trump, can talk down the US dollar thanks to its unique global status as a reserve currency.

Commodity prices, which typically move in the opposite direction to the US dollar, will suffer a double-whammy from the currency and fears of a Trump -induced global economic slowdown.

Our biggest miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) won’t be spared, but it’s the next-tier miners like Fortescue Metals Group Limited (ASX: FMG) and Independence Group NL (ASX: IGO) that will suffer more as they don’t have the same balance sheet strength.

Other blue-chips won’t be spared either as the contagion will spread to the big banks like Commonwealth Bank of Australia (ASX: CBA) and to other industrials like Qantas Airways Limited (ASX: QAN) and Treasury Wine Estates Ltd (ASX: TWE).

US Treasury Secretary Steven Mnuchin said the Trump administration is closely watching China to see if it is manipulating its currency. The US has so far refrained from labelling the Asian giant as a currency manipulator.

If the US ever did, it would clear the way for Trump to impose sanctions against China.

But given Trump is considering slapping every Chinese import into the country with additional tariffs, there may not be that much more the US could do to punish the country.

If there is any good news from this, the double threat of trade and currency conflicts is unlikely to derail the boom in a niche sector of our market.

The experts at the Motley Fool are feeling particularly bullish about the outlook for this sector and a handful of stocks.

Click on the free link below to find out more.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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