The US Dollar is undergoing enormous selling pressure. This comes on the heels of the March CPI data release—which also unexpectedly came in quite weak. This surprise inflation reading comes just ahead of former President Donald Trump’s planned ‘Liberation Day’ tariffs. If fully enacted, these announcements would have historic implications both domestically and globally on climate and the economy.
January CPI data released yesterday showed a much larger than expected drop in inflation that sent economist analysts scrambling to revise their economic outlook. With inflationary pressures coming down, the concern among markets is growing about the possible consequences of a US trade war that seems to be never-ending. Trump is set to announce an additional $200 billion in tariffs at any moment. These tariffs should lower inflation in both the US and the euro area, as HICP inflation in the euro area is expected to fall by 0.2 percentage points over the next year.
The trade war’s ramifications reach far beyond inflation either way. Most notably, experts are forecasting that a stronger dollar will reduce global demand, thereby reducing oil prices and eventually pulling down exchange rates. The seems to be counting on the US raising tariffs on all exported goods from China. This is likely to reduce prices for these goods and play a role in influencing the EUR/USD exchange rate. As Europe ends its economic downturn, analysts say this trade war will propel the Euro higher in relation to the Dollar as global economic stresses grow.
In reaction to the tariffs as now announced, market-based long-term inflation expectations have decreased by 10 to 15 basis points. This drop reflects the fact that investors have become risk averse. BIS They expect the pace of growth in the global economy to continue to decelerate. Oil prices are projected to continue their decline — potentially stoking this trend further. Lower energy costs typically translate into less inflationary pressure.
The weaker-than-expected CPI data, released just after poll requests went out, further complicates the picture. As inflation continues to come in below expectations, the US Dollar has come under renewed selling pressure. This development raises questions about the Federal Reserve’s future monetary policy decisions, as lower inflation could prompt a reconsideration of interest rates moving forward.
The impact of the US trade war is projected to have a huge negative impact on euro area economy. As HICP inflation slowly works its way back down, European policymakers may find that they must contend with the headwinds of weaker demand and greater economic uncertainty. The mercurial trade war now looms as a major potential brake on euro area growth. This economic downturn is likely to compound serious economic vulnerabilities already on display.