USD How does the Escalating Trade War Impact the Greenback

Global markets were thrown into flux once again when (yet again) US President Donald Trump poured gasoline on the simmering “Trade War” fire.

This morning, Trump tweeted that “if [EU trade tariffs] are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S. Build them here!” This tweet comes on the back of the EU’s decision to slap tariffs on $3B of US goods earlier today, which specifically targeted industries associated with Trump’s base such as bourbon, oranges, and motorcycles in an effort to exert political pressure on the President.

While the US President has been extremely hawkish on trade issues of late (who could forget his comment that “trade wars are good and easy to win”?), placing heavy tariffs on multi-trillion-dollar global automobile industry would represent a major escalation in the budding trade war. Not surprisingly, shares of all global automakers, including BMW, Volkswagen, Fiat Chrysler, Daimler, Ford and General Motors all fell on the tweet.

When it comes to the FX market, traders are struggling to place trade concerns into a coherent narrative. As the instigator of the recent trade tensions with most of its major partners (China, Canada, Mexico and the EU), the US economy could soon see exports take a hit from multiple directions. From another perspective, the US economy is outperforming most of its global peers and therefore may be best situation to weather a protectionist-driven economic slowdown.

And then there’s the question about whether meaningful tariffs will even be imposed in the first place; after all, the author of “The Art of the Deal” is infamous for staking out an aggressive stance and then eventually coming back toward his negotiating “adversaries,” a strategy we’ve seen play out numerous times through the first 17 months of the Trump presidency.

In the end, we believe that the current tensions will eventually subside as the US midterm elections in November approach. That said, if the current tough talk on trade translates into thorough tariffs, the US dollar could ultimately benefit as traders seek out the perceived safety of the world’s reserve currency, even if US economic growth takes a hit.