Australia Markets closed

Aussie dollar hit as Trump raises stakes

Swati Pandey

The Australian dollar has been dealt a blow after the United States threatened to slap further import duties on Chinese goods, fuelling fears of a full-blown trade war.

Washington has decided to impose tariffs on an extra $US200 billion worth of imports from China after efforts to negotiate a solution to the dispute failed to reach an agreement.

Also read: Is Brexit about to come to a halt?

The news rattled Asian markets on Wednesday and knocked the Australian dollar off a 3-1/2 week top to as low as 74.07 US cents.

It was last down 0.5 per cent at 74.23.

China is Australia's single biggest export market and easily the largest buyer of its commodities, so any development that risks a slowdown in China is seen as negative for the Aussie.

The currency is also used by investors as a liquid proxy for wagering China risks, global growth and resource prices in general.

The Aussie has fallen almost one per cent since early June when worries of a trade war began surfacing after a Group of Seven summit in Canada laid bare a deep rift on trade between US President Donald Trump and other leaders.

Also read: When will be the next interest rate move? And will it be up or down?

Wednesday's additional tariffs came as a surprise to many analysts who had suspected Trump's threats were a negotiating tactic.

"Fears are now strongly held this escalation will be met with a Chinese response and possibly counter-response from the United States," Greg McKenna, Sydney-based chief strategist at AxiTrader, said in a note.

"That puts the AUD/USD as an available and liquid proxy for all the worst fears about the impact of the trade war. A break of $0.7393 could open the floodgates to re-test lows."