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The greenback was not spared from tariffs unravelling the Trump Trades. Following US President Donald Trump’s decision to proceed with tariffs on Canada, Mexico, and China, US stagflation worries lowered the S&P 500 Index by 1.2% to 5778, its lowest level since the US elections on November 4. The DXY Index depreciated 1.1% to 105.56, its worst level since November 8, nearer the 103.89 level seen on November 4. Trump chided Japan and China for putting US goods at an unfair disadvantage through their weaker currencies. China has been keeping the USD/CNY fixing stable (averaging 7.18) since mid-November, while USD/JPY has been declining since the start of the year to below 150.
US Treasury Secretary Scott Bessent shrugged off Wall Street’s sell-off as temporary, adding that the focus was on Main Street and the rebalancing of the US economy. US Commerce Secretary Howard Lutnick hinted that Trump may offer some relief to companies that abided by the existing USMCA trade agreement. Even so, neither secretary played down the coming tariffs on steel and aluminium on March 12, the reciprocal tariffs from April 2, and other proposals on autos, semiconductors, pharmaceuticals, copper, lumber, and the EU. They also welcomed plans by a Taiwanese chipmaker and a Japanese automaker to build factories in the US to avoid tariffs.
Hence, it remains to be seen if any Trump compromise on tariffs on Mexico and Canada would be enough to fend off Mexico’s plan to retaliate with tariffs on Sunday. Canada struck back with an initial 25% tariff on CAD30bn of US imports, promising more levy on an additional CAD125bn three weeks later. China’s response has been measured and focused mainly on US agricultural and farm products. Today, China is expected to set this year’s growth target around 5% after vowing to fight to the “bitter end” a trade war with the US.
However, US inflation worries lifted the US Treasury 10Y yield by 8.9 bps to 4.24%. New York Fed President John Williams subscribed partially to half the market’s stagflation worries. Williams paid attention to the recent increase in inflation expectations driven by tariffs and signalled his intention to keep rates on hold at the upcoming FOMC meeting on March 18-19. Williams did not buy into US recession fears, merely acknowledging that GDP growth would slow from last year’s 2.8% level. Nonetheless, Williams’ faith in the resilience of the US economy would need to be substantiated by today’s ISM Services PMI, which consensus reckoned would slow to 52.5 in February from 52.8 in January. Prices paid is expected to remain unchanged at 60.4 while new orders increase to 51.5 from 51.3. Employment is expected to mirror the fall in manufacturing PMI to 51.6 from 52.3. While markets expect today’s ADP employment to slow to 140k in February from 183k in January, they see Friday’s nonfarm payrolls rising to 160k from 143k. Hence, it remains doubtful that the Fed will subscribe to the market’s three rate cut projection when it deliberates its Summary of Economic Projections.
The situation remains fluid, with global trade tensions continuing to shape market sentiment and economic expectations. While tariffs have triggered US stagflation worries and pressured the USD, markets will continue to watch US economic data and policy responses to gauge whether the US economy can absorb these shocks without derailing growth. If so, Trump’s protectionist-driven efforts to tilt supply chains back towards the US should lead to higher inflation that keeps US yield differentials wide in favour of the USD.
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