US Dollar Fluctuates Amid Tariff Uncertainty
The US dollar (DX=F, DX-Y.NYB) traded near its recent lows on Tuesday as investors grappled with the implications of President Trump's latest tariff announcements. On Monday, the dollar index experienced its sharpest decline since November 2023, retreating from near two-year highs after Trump refrained from imposing broad-based tariffs.
Trump's memorandum directing federal agencies to review US trade policy fueled speculation about potential blanket tariffs, leading to initial upward pressure on the dollar. However, this gain was later reversed as traders weighed the potential timing and impact of such measures.
Analysts note the dollar's sensitivity to tariff developments, particularly in light of the administration's "measured" approach compared to initial expectations. Despite recent setbacks, Bank of America believes the market should still factor in tariff risk, given its potential impact on the dollar.
The dollar's resilience stems from the post-election rally driven by Trump's election and Republican control of Congress, as well as expectations of reduced Fed easing in the future.
However, a sustained strong dollar could pose challenges for stocks, particularly for companies with significant overseas operations. Morgan Stanley's Mike Wilson warns that it could lead to increased dispersion in earnings per share revisions.
Additionally, Mohamed El-Erian, chief economic advisor at Allianz, highlights the negative impact on domestic competitiveness and emerging markets from a strong dollar.
Overall, uncertainty surrounding the timing and scope of tariff increases creates volatility for the US dollar. Analysts emphasize the need for continued vigilance as the administration's trade policies evolve.