S INCE THE trade war began in 2018 the damage done to the global economy has been surprisingly slight. America has grown healthily and the rest of the world has muddled along. But this week the picture darkened as the confrontation between America and China escalated, with more tariffs threatened and a bitter row erupting over China’s exchange rate. Investors fear the dispute will trigger a recession, and there are ominous signs in the markets—share prices fell and government-bond yields sank to near-record lows. To avoid a downturn, both sides need to compromise. But for that to happen President Donald Trump and his advisers must rethink their strategy. If the realisation has not dawned yet, it soon should: America cannot have a cheap currency, a trade conflict and a thriving economy.

The latest spike in tensions began on August 1st, when the White House threatened to impose a further round of duties on $300bn of Chinese exports by the start of September. China responded four days later by telling its state-run companies to stop buying American agricultural goods. On the same day it let its heavily managed currency pass through a rate of seven against the dollar, a threshold which may seem arbitrary but is symbolically important (see article).

That lit a fuse beneath the Oval Office. Mr Trump has long claimed that other countries, including China, keep their currencies artificially cheap to boost their exports, hurting America. He has been griping about the strong dollar for months. In June he accused Mario Draghi, the head of the European Central Bank, of unfairly weakening the euro by hinting at rate cuts. Hours after the yuan dropped, America’s Treasury designated China a “currency manipulator” and promised to eliminate its “unfair competitive advantage”. As the hostilities rose, markets swooned, with ten-year bond yields in America reaching 1.71%, as investors judged that the Federal Reserve will slash interest rates to try to keep the expansion alive (see article).