Weren’t Tariffs USD Negative?
The Dollar proved sensitive to headlines regarding trade during the US overnight session. However, contrary to what many commentaries would have you believe, as the risk of tariffs escalated the Dollar rose. The 90-day pause following Trump’s April ‘liberation day’ tariffs had been set to expire this coming Wednesday. To the relief of risk assets, the deadline for country-specific tariffs had been extended until August 1st. Trade negotiations have been ongoing throughout these 90-days with many hitting early stumbling blocks, notably the EU and Japan.
The Trump administration’s solution to this stalemate has been to issue letters to those nations considered for a trade deal. There have been little details provided regarding the outlook for such prospective deals which kept the Dollar bid yesterday. EURUSD pushed towards 1.17 as the President highlighted the prospect for additional tariffs above liberation day levels should any nation seek to escalate the trade war with the US.
So far, despite a defensive bid into USD, we have not seen the kind of risk-off moves associated with the ‘liberation day‘ event. The VIX remains well below its recent highs with the July futures contract rivalling its lowest level in three months as traders’ push their trade risk horizons out past July. The Dollar’s bid is as much as anything a reflection of the rotation out of foreign exchange as the trading future of these nations with the US remains uncertain. It should not be ruled out that US policy uncertainty and this administration’s handling of the tariffs could still ultimately prove to be Dollar negative on balance if some key trade deals materialise. However, so long as a majority of major non-US powers have the threat of tariffs over them, some episodes of USD strength may materialise upon deteriorations in trade sentiment.
Discussion and Analysis by Charles Porter
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