The US dollar is back on the offense, with the greenback having kicked into a recovery mode surprisingly enough over the last two weeks. This upward trend is about to come under serious threat. Market analysts predict that renewed selling pressure could arise if investors perceive a high probability of a third interest rate cut by the Federal Reserve this year. The US economy is predicted to substantially weaken. Analysts are looking for the unemployment rate to tick up to 4.2% and for average hourly earnings to gain 0.3% m/m.
Aside from US domestic economic indicators, international trade dynamics are set to play a major role in the US dollar’s fate. The US government has already made tariff changes. Taken together, these changes have increased the trade-weighted average tariff rate on all imports by roughly 5.5 to 6.0 percentage points. These tariffs are targeted at countries that maintain large trade deficits with the US. That list features countries such as China, the European Union, Mexico and South Korea. European economies will be hit particularly hard given their large dollar-value exports of passenger vehicles and parts to the U.S. This dependence on the automotive market makes them particularly vulnerable.
The consequences of these tariff changes go far beyond the US borders, impacting other large economies. The Reserve Bank of Australia (RBA) is expected to hold on its current rates in next week’s meeting. Any indication of a potential rate cut at its May meeting could exert downward pressure on the Australian dollar. The Canadian ‘loonie’ dollar has been strong and stable in recent months. The Canadian economy would be dealt a heavy blow if it becomes the collateral damage of hostile US tariff amendments.
US Economic Outlook and Implications
Analysts have had their eyes glued on the US economic landscape. Their predictions include a small rise in the unemployment rate and modest growth in average hourly earnings. All these indicators suggest a worsening economic undercurrent. Such a change might improve investor sentiment and help restore the dollar’s position as the pre-eminent currency in global markets. A third consecutive cut by the Federal Reserve appears almost certain. Market participants are obviously thinking in great detail about how this development is going to affect the value of that currency.
The possibility for yet another cut comes from an increasingly anxious desire to ensure continued economic expansion despite a backdrop of mixed signals and contradictory data. Should investors price in a strong probability of this monetary policy adjustment, the US dollar may experience renewed selling pressure. This situation illustrates the challenging balance that policymakers need to achieve to support economic uncertainty without undermining currency stability.
Impact of Tariff Changes on Global Trade
The recent tariff implementation by the federal government has brought US trade relations with important trading partners to a boiling point. By targeting countries with significant trade imbalances, including China, the EU, Mexico, and South Korea, these tariffs aim to address perceived disparities in international trade relationships. The impacts go well beyond just US-China trade relations.
European economies, that have become highly dependent on automobile exports to the US, will feel the greatest impact from these shifts. Tariffs on imports of all automobile parts are poised to upend long-established supply chains. This disruption now threatens to wreak havoc on economic growth throughout the entire continent. These protective tariffs take a shocking toll on Americans and foreign producers. Together, they can have a tremendous effect on global economic stability.
Broader Economic Concerns and Currency Movements
The ripple effects of US tariff changes are not limited to transatlantic relations. The Reserve Bank of Australia is set to hold interest rates steady at its next meeting, maintaining a cautious stance amid global economic uncertainties. Any hint of a future rate cut would see a sharp turnaround on the Aussie dollar’s recent gains.
Just as Canadian job losses would be welcome on the US side, so would Canadian dislocation by the US tariff changes. The Canadian dollar has actually been quite stable of late. Yet there are fears that the trade war could take a big toll on GDP. If Canada gets dragged into these tariff battles, its small economy will feel an acute impact. This raises serious questions about how safe these vulnerable countries can be when their economies are so dependent on trade.