Will new tariffs weigh on the Dollar?
Markets only care about China tariffs - everything else is a sideshow and Dollar neutral
Whenever the US has announced major tariffs, the Dollar has taken it on the nose. That was true for on-again, off-again tariffs on Canada and Mexico in early February and then - much more violently - for reciprocal tariffs announced in early April. As tariff headlines mount and August 1 emerges as an important deadline, today’s post discusses whether the coming wave of tariff announcements will weigh on the Dollar.
As I’ve noted in previous posts, the Dollar decline has happened in discrete steps that have coincided - for the most part - with US tariff announcements. The Dollar fell two percent in early February on on-again, off-again tariffs on Canada and Mexico. It then fell another four percent in early April when the US announced reciprocal tariffs and then quickly paused them for 90 days.
On both occasions, US back-and-forth caused markets to question what’s going on and weighed on the Dollar. More significantly, the second episode saw China start to devalue the Yuan, which fanned depreciation expectations and ended up destabilizing the Treasury market. That second episode highlights the outsized importance of China vis-à-vis every other country, which is what matters now. As the US announces trade deals with all kinds of places, none of these will matter for the Dollar as long as tariffs on China remain unchanged. In the eyes of markets, only China matters. Everyone else is a sideshow.