Dollar rallies on tariff threats and protectionism but inflation looms

The dollar actually rallied amid the prospect of higher tariffs last week. This is a break from the post-Liberation Day norm, but a return to the conventional way of thinking, whereby greater trade protectionism and heightened global uncertainty is generally seen as bullish for the greenback. Meanwhile, markets so far seem to be siding with Fed Chair Powell in his conflict with the White House, and have almost ruled out any chance of a cut in rates at July's FOMC meeting, particularly following the June Nonfarm Payrolls report.

We look to the June inflation report on Tuesday to validate the Fed's stance. Feed through from the tariffs to inflation has been very limited so far, but we doubt that this can last forever. Importers will eventually run out of the inventory they accumulated earlier in the year before the tariffs hit, and prices should adjust upwards, especially given the background of healthy growth in consumer spending. Meantime, the dollar seems to need some catalyst before it breaks down to lower lows, and a healthy inflation print is unlikely to provide it.