On Wednesday, U.S. President Donald Trump took one of the biggest steps back from his signature, and extremely controversial, tariff policy. This ruling provides the administration’s trading partners and financial markets a welcome breather. The announcement comes as the U.S. dollar index is at 102.41 on Thursday. This index gauges the greenback’s strength against a broad array of currencies. This figure as of today finds itself 30 points lower than January’s peak highs of about 110. This decline is the first indication of a distinctly bearish tone in market sentiment.
Just a few days ago, the U.S. administration dropped a big bombshell. They will reduce reciprocal tariff rates, which were agreed from the beginning on an extremely high level, to 10% for 90 days. This proposal was intended to provide more predictable and sustainable market conditions for traders and investors. In short, it would go a long way toward relieving the burden created by recent market conditions. The announcement led to an immediate rebound in the U.S. dollar, which was projected to continue “to trade in a volatile 102.00-103.50 range.”
Despite the positive market response, S&P 500 futures were last down 2.1% at 9:44 a.m. London time, reflecting lingering doubts about the long-term implications of the tariff policy shift. In fact, analysts noted that markets exploded with joy immediately following Trump’s announcement. They warned that the general economic picture remains rife with uncertainty.
“The market is reacting too optimistically today, unless Trump announces further tariff reduction and credibly refrains from future retaliatory increases.” – Preston Caldwell, U.S. economist at Morningstar
On Wednesday, Wall Street was in the midst of a historic rally, which continued into Asian and European markets on Thursday. This jump was driven by optimism that Trump’s unexpected move would help reduce trade tensions and restore calm to the economy. Experts cautioned that the recent tumult has already done serious harm. This effect may reverberate among their global economic partners in next year’s expected trade negotiations.
We do understand that the U.S. administration is responding to intense lobbying from businesses and short-term pressure from financial markets. This response is making the economic picture even murkier. Almost constant insanity in policy has created volatility that sends shockwaves throughout the whole U.S. economy. This uncertainty affects everything – business sentiment, stock market, strength of the dollar.
“The average tariff rate as of today still stands at around 20%, with the tariff rate on China at around 125% constituting a de facto embargo.” – Preston Caldwell, U.S. economist at Morningstar
Though the rollback is good news, analysts are worried about the long-term impact of the tariff policy rollback. Economic predictions even warn of a possible double-digit inflation spike, perhaps right as we hit an economic downturn.
“It’s going to take a little bit of time and some confidence rebuilding,” said Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management.
Caron emphasized the long-lasting impact of market shocks on investor confidence, stating that “the damage that’s been done is essentially a shock to confidence that has made people demand a bigger discount to buy certain assets.” He pointed out that this demand has a positive impact on not only bonds, but equities.
Nonetheless, industry leaders are cautiously optimistic that things can rebound from some of these setbacks. Caron added, “Over time, we’ve seen shocks in markets before. These things have a way of getting crowded and healing themselves.”
These last week’s developments have provided some short-lived relief to the markets. Doubt continues to loom over economic predictions. Deutsche Bank Research economists and strategists highlighted that despite recent gains, “this still left the S&P 500 -3.77% below its level prior to the reciprocal tariff announcements on April 2.”