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 The dollar fell against safe havens such as the yen and Swiss francin early trading in Europe Friday, but was higher against most other currencies after President Donald Trump announced a sharp escalation of the U.S.’s trade war with China.

The yen had its best day against the dollar in two years on Thursday after the announcement of a new 10% tariff on $300 billion worth of imports from China. By 3 AM ET (0700 GMT), it was at 106.95 to the dollar, having risen to its highest since April 2018 against the greenback earlier.

The dollar was also lower against the franc at 0.9880, as traders unwound carry trades in a broad risk-off move across all markets.

Trump’s announcement shattered a fragile truce with China over trade that had been hastily put in place ahead of the G20 summit a month ago. It represents a sharp escalation of the conflict, by extending tariffs to effectively all U.S. imports from China. As such, the risk of them feeding through to higher prices for U.S. consumers is markedly higher.

Analysts from the Peterson Institute in Washington estimated that the move will raise the average tariff on Chinese products to 21.5%, from barely 3% in 2017 when Trump took power.

Trump’s move came only a day after Federal Reserve chairman Jerome Powell had pointed to the trade dispute as the biggest single risk facing the U.S. and global economies – observations that drew criticism from Trump show said that Powell had “let us down.”

“Ironically the Fed’s easing gives the President the breathing space to now play hard ball,” Megan Greene, a senior fellow at the Harvard Kennedy School, said via Twitter.

The dollar surged against high-yielders overnight, hitting a 10-year high against the Aussie and rising sharply against the Korean won and kiwi. It also surged 1% against the offshore Chinese yuan, although China’s central bank restrained the drop in the official rate.

The impact on the euro and British pound was less severe, although reports that Trump may make an announcement on trade with the EU later Friday added to the general sense of unease.

The dollar index, which tracks the greenback against a basket of currencies, hit its highest level since May 2017 at 98.697 overnight, before retracing to 98.105 in European trading.

The escalation of the trade war threatens to overshadow what would normally be the main event of the monthly economic calendar – the release of the U.S. labor market report for July. Nonfarm payroll growth is expected to have slowed to 160,000 from 224,000 in June.

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In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s economic policy, including its objectives for growth and employment. The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-looking framework for discussion among MPC members as an aid to our decision-making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect. Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPC’s best collective judgement about the most likely paths for inflation, output and unemployment, as well as the uncertainties surrounding those central projections. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee: Mark Carney, Governor Ben Broadbent, Deputy Governor responsible for monetary policy Jon Cunliffe, Deputy Governor responsible for financial stability Dave Ramsden, Deputy Governor responsible for markets and banking Andrew Haldane Jonathan Haskel Michael Saunders Silvana Tenreyro Gertjan Vlieghe

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Unemployment in the U.S. is at a half-century low and the S&P 500 is trading at near-record highs. Nevertheless, the Federal Reserve today trimmed interest rates for the first time since the financial crisis on stalled manufacturing growth and an anticipated world economic slowdown.

The easing cycle may be the catalyst gold needs to outperform the market and retrace its monster bull rally in the 2000s, according to Bloomberg Intelligence strategist Mike McGlone.

“Gold prices appear on a similar launchpad as 2001 when the Fed began an easing cycle,” McGlone writes in a note dated July 29. “The greatest bull market of this millennium so far began about the time of that first rate cut, following an extended gold-price downdraft and rally in the dollar.”

With the Fed having locked in a rate cut, the question now is: What happens in the months to come? Is this simply a one-off, or is it indeed the start of a new easing cycle?

Markets appear to have priced in three cuts by year-end. As a result, I would expect to see the dollar trade lower, which in turn should allow the price of gold—the classic anti-dollar—to soar.

As I shared with you earlier in the month, a weaker greenback is one of three “key ingredients” for a gold bull market, according to research firm Alpine Macro, the other two being a more accommodative Fed (check) and rising geopolitical risk

As Europe faces prospects that negative rates might become a long-term fixture in the euro region, concerns are mounting in the U.S. that a global slide toward negative yields could infect the market for Treasury securities, should the U.S. slip into a recession,” writes Guggenheim Investments Chief Investment Officer Scott Minerd. “These concerns are well founded.”

Minerd reminds readers that, during economic slowdowns in the past, the Fed reduced rates by an average of 5.5 percentage points. Today, as you well know, we don’t have those 5.5 percentage points—unless rates were allowed to fall below zero.

Yields turning negative here in the U.S., as they have in Europe, Japan and elsewhere, would mark the start of a “paradigm shift” that billionaire hedge fund manager Ray Dalio alluded to in a recent LinkedIn post.

According to Dalio, lower-for-longer rates and other unorthodox monetary policies “will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth.”

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The US dollar is rallying against a basket of currencies to close out the trading week, driven by a better-than-expected but slower than usual second-quarter economic report. The gross domestic product cooled down in the April-to-June period, but there were some bright spots in the overall report, including a surge in consumer spending.

According to the Bureau of Economic Analysis (BEA), the gross domestic product advanced a 2.1% annual clip in the second quarter, down from 3.1% in the first three months of 2019. This was higher than the market forecast of 1.9%.

Despite the disappointment behind the report, a deep dive into the numbers do paint somewhat of a positive portrait of the US economy from a consumer standpoint. In the April-to-June period, consumer spending surged 4.3%, driven by greater automobile, food, and apparel purchases. But it was not good news for businesses because fixed investment slipped 0.8%, investment dropped 11%, spending on equipment edged up just 1%, and outlays fell 1.5%.

Researchers say that if inventories would have remained neutral instead of declining $44.3 billion, then the economy would have expanded at a 3% rate in the second quarter.

Elsewhere in the report, the trade deficit impacted GDP as imports decreased and exports soared 5.2%. Federal government spending spiked 5%. Inflation, using the Personal Consumption Expenditures (PCE) index, clocked in at a 1.4% pace year over year. 

Researchers say that if inventories would have remained neutral instead of declining $44.3 billion, then the economy would have expanded at a 3% rate in the second quarter.

Elsewhere in the report, the trade deficit impacted GDP as imports decreased and exports soared 5.2%. Federal government spending spiked 5%. Inflation, using the Personal Consumption Expenditures (PCE) index, clocked in at a 1.4% pace year over year.

Since Federal Reserve officials have made public their concern about a potential slowdown, the latest economic figures could push the Eccles Building to impose a 25-basis-point cut to interest rates from the current target range of 2.25% to 2.50%. More than half the market anticipates two rate cuts this year, according to the CME Group FedWatch tool.

Although this report does suggest that the US economy might expand more slowly in the second half of 2019, some financial institutions believe that this is just a slight bump in the road. Goldman Sachs is prognosticating that growth will return to normal in the second half.

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Coffee shipments from India, Asia's third-largest producer and exporter, remained flat at 2,38,669 tonnes so far this calendar year with maximum shipments made to Italy, as per the Coffee Board.

The country had shipped 2,37,780 tonnes of coffee bean during January-July in the previous year, its data showed.

India exports large volumes of Robusta variety of coffee bean, followed by Arabica and instant coffee.

According to the board, export of Robusta coffee rose to 1,35,892 tonnes till July 2019, from 1,26,254 tonnes in the year-ago period.

Arabica coffee shipments, however, declined to 37,609 tonnes from 40,795 tonnes in the said period.

Even shipment of instant coffee showed a decline as volumes dropped to 12,504 tonnes during January-July of this calendar year from 16,303 tonnes in the same period in 2018.

Re-export of coffee was also slightly down at 52,513 tonnes from 54,222 tonnes in the period under review.

Of the total exports, more than 55,000 tonnes of coffee is estimated to have been shipped to Italy, followed by over 25,000 tonnes to Germany and about 16,000 tonnes to Russian Federation.

The country's coffee output is pegged at 3,19,500 tonnes for the 2018-19 marketing year (October-November), as against 3,16,000 tonnes in the previous marketing year.

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The Indian readymade garment (RMG) makers are likely to witness revenue growth of 10 per cent in this calendar year, mainly driven by healthy domestic demand and 10 per cent growth in exports, the report said.

Crisil Ratings expect revenue growth of RMG makers to accelerate 300 basis points (bps) to 10 per cent in calendar 2019 (CY), compared with 7 per cent in CY2018, riding on robust domestic demand and a spurt in exports.

Higher revenue growth will provide the benefit of operating leverage and will help improve profitability, it said adding that profitability of exporters is also aided by favourable exchange rate and restoration of incentives, resulting in better cash generation, which will improve the credit profiles of RMG firms this fiscal.

Credit profiles had moderated in the previous two fiscals owing to depreciation in the rupee against the dollar and a reduction in export incentives, it said.

Domestic sales logged an annual growth rate of 9.6 per cent in the five years through CY2018 to Rs 4.83 lakh crore, which was 80 per cent of the sector's revenue.

That pace is set to increase to 10-10.5 percent this year for two reasons, increasing penetration of both organised retail and brands in tier II and III cities, and rising growth of value apparel retail segment.

Complementing healthy domestic growth will be a rebound in exports growth to 7-8 per cent this year after two years of de-growth. In the first 6 months of this year, RMG exports are already up over 10 per cent compared to last year.

Exports growth will benefit from a likely depreciation in the rupee against the dollar, a partial restoration of export incentives recently and a pick-up in growth in the United Arab Emirates, the third-largest exports destination after the US and the European Union, the report said.

"Operating profitability of domestic-focussed RMG firms is expected to remain stable at 10-11 per cent, whereas that of exporters should improve another 50-100 bps this fiscal, on top of the 100-120 bps increase seen last fiscal. Exporters will benefit from the higher export incentives," Crisil Ratings senior director Anuj Sethi said.

Going forward, currency volatility and the government policy on export incentives will be key things to watch out, he added.

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The Indian readymade garment (RMG) makers are likely to witness revenue growth of 10 per cent in this calendar year, mainly driven by healthy domestic demand and 10 per cent growth in exports, the report said.

Crisil Ratings expect revenue growth of RMG makers to accelerate 300 basis points (bps) to 10 per cent in calendar 2019 (CY), compared with 7 per cent in CY2018, riding on robust domestic demand and a spurt in exports.

Higher revenue growth will provide the benefit of operating leverage and will help improve profitability, it said adding that profitability of exporters is also aided by favourable exchange rate and restoration of incentives, resulting in better cash generation, which will improve the credit profiles of RMG firms this fiscal.

Credit profiles had moderated in the previous two fiscals owing to depreciation in the rupee against the dollar and a reduction in export incentives, it said.

Domestic sales logged an annual growth rate of 9.6 per cent in the five years through CY2018 to Rs 4.83 lakh crore, which was 80 per cent of the sector's revenue.

That pace is set to increase to 10-10.5 percent this year for two reasons, increasing penetration of both organised retail and brands in tier II and III cities, and rising growth of value apparel retail segment.

Complementing healthy domestic growth will be a rebound in exports growth to 7-8 per cent this year after two years of de-growth. In the first 6 months of this year, RMG exports are already up over 10 per cent compared to last year.

Exports growth will benefit from a likely depreciation in the rupee against the dollar, a partial restoration of export incentives recently and a pick-up in growth in the United Arab Emirates, the third-largest exports destination after the US and the European Union, the report said.

"Operating profitability of domestic-focussed RMG firms is expected to remain stable at 10-11 per cent, whereas that of exporters should improve another 50-100 bps this fiscal, on top of the 100-120 bps increase seen last fiscal. Exporters will benefit from the higher export incentives," Crisil Ratings senior director Anuj Sethi said.

Going forward, currency volatility and the government policy on export incentives will be key things to watch out, he added.

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• The country’s holdings of foreign currency generated an annual average return of 3.68 per cent from 2005 to 2014
• By the end of 2014, US dollar assets accounted for 58 per cent of China’s total foreign exchange reserves, down from 79 per cent in 2005

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GBP TALKING POINTS:

• CBI warns neither UK nor EU are ready for the disruption that a no-deal would cause
• GBP faces further losses as Boris Johnson appoints hard-line Brexiteers as cabinet members to ensure Brexit is delivered by October 31
• BoE expected to keep rates unchanged at 0.75% on Thursday as Brexit uncertainty continues

Increasing talks of a no-deal Brexit are not boding well for the pound as GBPUSD fell to 28-month lows and EURGBP surpassed the psychological 0.90 line. Since Johnson was appointed as PM last Tuesday the pound has fallen 1.5% against both the dollar and the euro, as he formed his cabinet with hard-line Brexiteer members, putting everyone on notice that he is serious about his “do or die” stance on Brexit.

In recent news, Business Industry experts CBI have warned the government that neither the UK nor the EU are prepared to face the consequences of a no-deal Brexit, where almost every sector of the EU and UK would face disruption. The report suggests that despite UK businesses having spent billions of pounds already on contingency plans in case of a hard Brexit, the uncertainty and lack of clarity about dates and costs has left most of them feeling like there are not enough measures in place to counteract the disruption.

But instead of pressuring the PM to work together with the EU to achieve amendments to the current deal, Boris Johnson could use this information as leverage to continue his “deal or no-deal stance” if he believes that the EU will give in to pressure because they are also considered to be unprepared for a hard Brexit. But given the repeated warnings by EU commissioners that there is no possible amendment that can be made to the current withdrawal deal, it is unlikely that a new deal will be reached before the October 31 deadline.

Jean-Claude Juncker told Boris Johnson last week that the EU would analyse any proposals put forth by the UK as long as they were compatible with the terms set out in the agreement initially negotiated with Theresa May. The main point of divergence between both sides of the agreement is the Irish backstop, which would leave the UK abiding by EU rules unless another arrangement is found. Boris Johnson has said that the only way to avoid a no-deal Brexit would be to abolish the backstop from the agreement, which the EU has rejected.

The Bank of England will release its inflation report on Thursday ahead of its interest rate decision with expectations that rates will remain unchanged at 0.75% as MPC officials stick to their wait and see what happens with Brexit before adjusting its monetary policy rhetoric, given that both inflation and the jobs market are behaving well.

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Finance minister Nirmala Sitharaman, called for a "significant" reduction in the central bank's policy rates and said the government did not intend to review the budget proposal for overseas sovereign borrowings, the Economic Times (ET) reported on July 29.

India's benchmark 10-year bond yield was down 10 bps at 6.43% after falling to 6.42% immediately after market opened on the back of her comments.

The minister also said the increase in surcharge on foreign portfolio investments (FPI) was not intended to hurt investors, according to an interview published by the paper.

An influential Hindu nationalist group close to Prime Minister Narendra Modi's ruling Bharatiya Janata Party has demanded his government review its plan to raise money by selling foreign currency bonds, Reuters reported earlier this month.

"I am not doing any review. I have not been asked by anyone to do a review," Sitharaman told ET.

The minister also told the paper there was room for further interest rate cuts.

"I'll honestly wish rate cut and yes a significant rate cut, would do a lot of good for the country," Sitharaman told the paper in an interview.

"We will now have to look at that route with a lot more hope. And, the industry also feels that there is space for it."

Indian shares pared early gains and moved lower on Monday with the broader NSE Nifty falling 0.3%.