Dollar suffers from Trump’s tariff announcements

Trump + tariffs = renewed uncertainty

Volatility traders must be over the moon with the latest announcements, as expectations for a quieter August have been quickly defeated. US President Trump has put tariffs back into the spotlight, unsettling investors who have recently appeared overly complacent.

India is the first country to face a “tariff surcharge” due its economic relationship with Russia, with the overall tariff rate rising to 50% and set to begin on August 27. Interestingly, Trump did not exclude the possibility of China facing a similarly sized tariff jump, although special advisor Navarro quickly downplayed such a possibility.

At the same time, the Swiss president is leaving Washington empty-handed, as Trump stands firm on the 39% tariff rate announced last week. The SNB might welcome a bit more inflation or some Swiss franc weakening, but neither is happening yet. Similarly, the yen is treading carefully amidst rumours of an extra 15% tariff imposed on Japanese exports to the US. Crucially, these headlines are unsettling since the two countries signed a trade deal just 15 days ago.

But Trump’s most notable announcement was the 100% tariff to be imposed on imported chips and semiconductors. Despite being aware that relocating production is a complex and multi-year process, Trump has opted to punish the numerous US tech companies with manufacturing sites in Asia. Notably, Apple has been spared, as it promised an extra $100bn investment in the US, bringing the total commitment to $600bn.

Equities higher, dollar continues to suffer

Despite Trump’s tariffs announcements, US equity indices continue their recovery, with a decent rally posted on Wednesday, erasing Tuesday’s weakness. Notably, the cyclical consumer discretionary sector is leading the rally in the S&P 500 index this week, outperforming the mighty technology sector.

The same cannot be stated for the dollar though, which is suffering across the board this week. Euro/dollar appears poised to knock on the 1.1700 door, while dollar/yen is slightly in the red today despite tariff-related headlines. Even the battered pound is climbing today, with pound/dollar posting its fifth consecutive daily gain.

Notably, despite the progress made in the US-Russian negotiations this week, and Trump potentially preparing for meetings with Presidents Putin and Zelensky next week, gold is climbing once again today. The dollar’s lingering weakness is potentially fueling this move, along with low expectations for a meaningful outcome from the aforementioned meetings.

Fedspeak points to a September rate cut

Fed Chair Powell is potentially one of the few officials welcoming the latest developments. The renewed tariff uncertainty and its potential inflation impact justify his ‘wait-and-see’ approach at the recent FOMC. That said, Fedspeak is gradually confirming market expectations for a September Fed rate cut, contributing to the dollar’s weakness. Atlanta Fed President Bostic will be on the wires today; it would be surprising if his message deviates significantly from Wednesday’s remarks by San Francisco Fed’s Daly and Minneapolis Fed’s Kashkari.

Meanwhile, discussions about Adriana Kugler’s replacement continue. Some speculate that her replacement could be in the front seat to take over when Powell’s term ends, but that sounds too simple and straightforward for Trump’s modus operandi.

BoE: rate cut and dovish rhetoric?

The BoE is meeting later today, with a rate cut widely expected and fully priced in by the market. The main unknowns are the overall tone of the press statement and press conference, the quarterly inflation projections in the Monetary Policy Report, and the voting pattern. The latter could prove decisive for rate cut expectations going forward, particularly if there is split today with ultradoves seeking a 50bps rate cut and/or ultrahawks favouring a pause.

While the pound is in dire need of a boost against the euro, indications point to a dovish meeting. Should that be the case, a new 1.5-year high in euro/pound, above the recent high of 0.8753, looks plausible. On the flip side, in the event of a more balanced meeting, the pound could see decent demand, pushing euro/pound towards the 0.8670 area.