Consequences for the USD exchange rates are reversed – Commerzbank
A reasonably normal tariff policy would cause the dollar to appreciate. Why? Because US consumers would prefer to consume US goods instead of imported goods, and US companies would prefer to install US machinery. After all, no tariffs would have to be paid on that. This means that demand for US goods would increase, as would their price relative to foreign goods, Commerzbank's Head of FX and Commodity Research Ulrich Leuchtmann notes.
Tariffs don’t seem to strengthen the USD
"This can happen in two ways: larger numbers on price tags in the US (i.e. US inflation) or a stronger US dollar. The US Federal Reserve would have the choice between the two alternatives because it is the Fed that controls price developments. And because the Fed is generally assumed to want to keep inflation at 2%, the logical conclusion from the market's perspective was that the US tariff policy would strengthen the USD."
"But it gets worse. These sudden interest-rate cut expectations don't just appear out of thin air. They reflect the anticipation of a massive negative real economic shock as a result of US tariff policy. I suspect that most market participants expect the US economy to slide into a recession as a result of the tariffs."
"The economic 'story' that the market is telling us with these two-track inflation expectations is that a recession or recession-like conditions will cause US demand to slump to such an extent that the initial increase in costs resulting from tariffs will be more than offset in the medium term. If that were to happen, the tariffs' medium-term price effect would evaporate – along with any reason for a stronger US dollar."
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FXStreet Insights Team
FXStreet
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