The US-China standoff risks escalating into an outright financial war with no winners, the banks head of global FX research warns

The global financial system is moving into "unchartered territory," as the tariff escalation between the US and China could devolve into an "outright financial war," George Saravelos, Deutsche Bank's global head of foreign exchange research, has warned.

Saravelos issued the warning in a note to clients on Wednesday, which was quoted by multiple media outlets. The analyst, who has repeatedly warned about a looming dollar crisis and a global loss of trust in the US currency, described the current situation as a "collapse" in markets.

"We are witnessing a simultaneous collapse in the price of all US assets, including equities, the dollar versus alternative reserve FX and the bond market. We are entering unchartered territory in the global financial system," he wrote.

The global market is rapidly de-dollarizing faster than previously anticipated, and it remains unclear "how orderly this process can remain," Saravelos warned. The current situation appears to be different from a "typical crisis environment," when the market "would be hoarding dollar liquidity to secure funding for its underlying US asset base," he noted.

"Dynamics here seem to be very different: the market has lost faith in US assets, so that instead of closing the asset-liability mismatch by hoarding dollar liquidity it is actively selling down the US assets themselves," Saravelos wrote, adding that the actions of the administration of US President Donald Trump have been "encouraging the sell-off in US Treasuries."

The US-China trade war may have serious implications for the global economy and risks devolving into an "outright financial war," given that the extreme tariffs imposed by Trump have left little room "for an escalation on the trade front," Saravelos warned. Beijing now "appears to be maintaining the optionality of weaponizing the currency while signaling a far more supportive domestic economic stance."

"The next phase risks being an outright financial war involving Chinese ownership of US assets, both on the official and private sector front. It is important to note there can be no winner to such a war: it will damage both the owner (China) and the producer (US) of those assets. The loser will be the global economy," he wrote.

China has become the central target of Trump's purported effort to straighten out America's trade balance, which involves the introduction of "retaliatory" tariffs on most of the world's nations. In March, Trump imposed a 20% tariff on Chinese imports, adding an additional 34% last week. Beijing responded in kind, introducing a 34% tariff on US goods - after which Trump slapped on another 50%, bringing the total to 104%.

This week, China rolled an additional 50% on American imports, bringing the levy to a total of 84%. Trump responded by raising the tariffs to 125% on Wednesday before the latest Chinese measure even took effect.

(RT.com)