US-China trade war may become a currency war within two years, strategist says

China's President Xi Jinping and U.S. President Donald Trump attend a welcome ceremony at the Great Hall of the People in Beijing on November 9, 2017.
Nicholas Asfouri | AFP | Getty Images

The U.S. could spark a currency war in "two to three years" once it shifts away from its trade war with China, a strategist claimed Friday.

Speaking on CNBC's "Squawk Box Europe," Christian Gattiker, head of research at Julius Baer, said the U.S. Federal Reserve has been yielding to pressure from the White House with its policy — a pattern that could shape the dollar's future.

"They moved 180 degrees from being in auto-pilot tightening mode to cutting rates and easing monetary policy, so I think there is a certain pressure on," he said.

Gattiker added that the current geopolitical environment was creating new objectives for the U.S. central bank, including the maintenance of an "orderly economic environment."

"With its new mandate, (the Fed) is entitled to yield to this pressure, even in the greater scheme of things with the trade war. So I think a weaker dollar is warranted from a U.S. perspective," he said. "We might actually be turning from a trade war situation to a currency war situation in the next two to three years."

Trade war may become a currency war within two to three years: Bank Julius Baer
Trade war may become a currency war within two to three years: Bank Julius Baer

A currency war occurs when a nation deliberately depreciates the value of its domestic currency in order to stimulate its own economy.

President Donald Trump has recently made accusations that other nations and regions have manipulated their currencies to gain "unfair" competitive advantages.

Earlier this month, Trump claimed China has given itself a "tremendous" advantage by weakening its currency, and that the playing field needed to be leveled.

"Don't forget, the head of the Fed in China is President Xi. He's the president of China ... he can do whatever he wants. They devalue, they loosen, or you would just say they pump a lot of money into China, and it nullifies to an extent — not fully — it nullifies the tariffs," Trump said in an interview with CNBC's "Squawk Box."

A week later, the U.S. president accused the European Central Bank of using its monetary policy to make it "unfairly easier for (Europe) to compete against the USA."

"They have been getting away with this for years, along with China and others," he said in a tweet.

In February, the UN warned in a report that elevated trade tensions could "spiral into currency wars, making dollar-denominated debt more difficult to service."

'Bargaining chip'

Meanwhile, Mauro Guillen, professor at the Wharton School of the University of Pennsylvania, told "Squawk Box Europe" Friday that the U.S. was losing credibility by unexpectedly imposing tariffs on trade partners — and that its practices could inadvertently damage the dollar's dominance over international trade.

"The bargaining chip that the U.S. has is the size of its domestic market — everybody wants to play in it," he said.

US is losing credibility and 'playing with fire' on trade, academic says
US is losing credibility and 'playing with fire' on trade, academic says

But the power of the U.S. market could be dimmed within the next decade, with China expected to overtake the U.S. as the largest consumer market in the world. Guillen warned that Trump was "playing with fire," as it would be much harder in the near future "to use that weapon in trade negotiations."

With China continuously attempting to bypass the dollar when it engages in trade, the greenback's position as the default currency for commodity and bilateral trading could come under threat within five to 15 years, Guillen added.

"The seeds of change are there, and I think this (U.S.) reaction against the global trading system, against liberalism, against free trade and so on and so forth may backfire," he said.

"The U.S. has — for the last 50, 70 years — been at the forefront in terms of opening up markets, and now they're doing just the opposite. I don't think that this is, in the long-run, in the best national interests of the United States."