US-China agree to sharply cut reciprocal tariffs for 90 days, easing fears of protracted trade war
The US and China agreed over the weekend to temporarily lower reciprocal tariffs on each other's goods, according to a joint statement released on Monday. Starting May 14 and for 90 days, the US will reduce its levies from 145% to 30%, while China will lower them from 125% to 10%.
Additional takeaways
- Both the United States and China said they "will modify the application of additional ad valorem rate of duties by suspending 24 percentage points of that rate for 90 days."
- Only a 10% base tariff rate will be applied.
- A separate 20% tariff from the US over the so-called fentanyl trade will remain.
- A mechanism to continue discussions about economic and trade relations is established.
- These discussions may be conducted alternately in China and the US, or in an agreed third country.
- Both sides may conduct working-level consultations on relevant economic and trade issues.
Market reaction
At the time of writing, the US Dollar Index (DXY) is up 0.62% on the day, trading near 101.00, with risk sentiment receiving a fresh boost.
(This story was updated on May 12 at 10:00 GMT to clarify the impact of the tariff reductions on the current levels imposed.)
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
