History tells us that big movements in financial markets are difficult to predict, but when they come they happen very quickly. That is what we have seen over the past several days, as investors around the world have responded to a sudden escalation in the trade war between the world’s two largest economies, the United States and China, and the growing realization that at least one of these economies is being led by someone who doesn’t appear to understand the risks he is taking.

After posting their biggest decline of the year on Monday—a slide of three per cent—U.S. stocks rebounded somewhat on Tuesday morning. The modest rebound came after the the Chinese central bank signalled that, for now at least, it wouldn’t allow another decline in the value of the Chinese currency, the yuan. Monday’s big fall on Wall Street came after the yuan fell almost two per cent on that day, and Chinese officials suggested that the decline was a response to President Trump’s decision, last week, to broaden tariffs on Chinese goods. In a further escalation, the Trump Administration announced, on Monday evening, that it was designating China as a currency manipulator, a move that Trump signalled on Twitter by accusing the Chinese government of “trying to steal our businesses and factories.” (A lower value of the yuan makes Chinese exports more competitive.)

The trade dispute between the U.S. and China has been rumbling along ever since Trump took office, of course, and many Chinese exports to the U.S. are already facing Trump-imposed tariffs. But this whirlwind of escalation came without any warning, and it fuelled fears that events are spiralling out of control. “The US Treasury’s designation of China as a currency manipulator signals that the trade war is expanding into an all-out and open economic warfare between the two countries,” Eswar Prasad, a Cornell University economist and expert on China, told the Financial Times. Posting on Twitter, Lawrence Summers, the Harvard economist who served as the director of the National Economic Council during the first Obama Administration, warned, “We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the US and China.”

The current crisis began on Thursday, when Trump—ignoring warnings from his top advisers—suddenly announced that his Administration would levy tariffs on an additional three hundred billion dollars’ worth of Chinese goods, beginning September 1st. After meeting in June with Xi Jinping, the Chinese leader, Trump agreed not to take this step, and talks between the two sides resumed. But the President changed his mind after Robert Lighthizer, the U.S. Trade Representative, and Steven Mnuchin, the Treasury Secretary, returned from talks in Shanghai without securing the concessions that Trump had been demanding, including an immediate agreement by China to boost its imports of U.S. agricultural products.

When Lighthizer and Mnuchin briefed Trump about their trip in the Oval Office last Thursday afternoon, his response, according to reporting by the Wall Street Journal, was “Tariffs.” “Those present included his national-security adviser John Bolton, top economic adviser Lawrence Kudlow, China adviser Peter Navarro and acting chief of staff Mick Mulvaney,” the Journal story reported. “All of them, save Mr. Navarro, a China hawk, adamantly objected to the tariffs.”

Dismissing the dangers that a trade war poses to the economy, Trump insisted on getting his way. He did the same thing again after the Chinese central bank allowed the value of the yuan to drop sharply against the dollar on Monday. Although the Treasury Department formally made the decision to designate China as a currency manipulator, few can doubt that Trump was the instigator. In a series of tweets posted hours before the official announcement, Trump noted that the value of the yuan had fallen, accused the Chinese government of manipulating its currency for a long time, and declared, “Not anymore!”

The designation itself won’t have much practical effect. It merely requires the Treasury Department to consult with the International Monetary Fund, which only last month rejected the Trump Administration’s argument that Beijing was artificially lowering the value of the yuan and said that the Chinese currency was trading in line with economic fundamentals. But in labelling China as a currency manipulator, Trump again signalled his eagerness to escalate at the first sign of Chinese backsliding. It now seems certain that he will allow the new tariffs to go into effect on September 1st. At that stage, practically all Chinese goods entering the United States will face some sort of levy.

Trump’s argument all along has been that the United States is better placed than China to survive a lengthy trade war. In relative terms, he may be right: China’s economy is more dependent on the U.S.-China trade relationship than the U.S. economy is. But Beijing also has leverage, particularly from its growing role in international financial markets. As Trump prepares for a reëlection campaign, the last thing he needs is a big drop in the American stock market, the strength of which he boasts about all the time. Chinese policymakers are well aware of this vulnerability.

On Monday, Beijing played its currency card. It has several others. Conceivably, China could threaten to liquidate some of its vast holdings of U.S. Treasury securities. Some economists doubt that China would be in a position to carry out such a threat, or that there would be much of an impact even if it did. But merely raising the possibility could spark panic-selling by investors. Beyond hiking U.S. tariff rates to even more punishing levels, there wouldn’t be much Trump could do about it.

These are speculations rather than predictions. But the larger point is that tit-for-tat disputes can inadvertently generate a destructive dynamic of their own—and can lead to outcomes that neither side wanted or anticipated. The U.S.-China trade dispute is now a currency war as well, and, judging by the events of the past few days, it could well expand in other directions. Trump may think he still has everything under control. Does anyone else believe him?