The US dollar has advanced by about 0.4% from the lows late in US trading yesterday after tariff escalation fears receded somewhat after President Trump reversed his earlier announcement to double Canada’s steel and aluminium tariff from 25% to 50%.
This followed “constructive” talks between Canada and Howard Lutnick. But the broader 25% tariff has gone live – this also looks like it will hold unlike the Canada and Mexico tariffs of 25% on all goods that have been reversed twice and are now scheduled for 2nd April. So the steel and aluminium tariffs are likely to be the first act on all US trading partners and the first actions taken beyond China that are likely to stay.
So escalation is more real now and points to probable action by the US on 2nd April which looks like the date when we could get a real significant uplift in the escalation of the trade conflict. Retaliation from Europe has been swift and EU Commission President Ursla von der Leyen has just spoken in Brussels to confirm that the EU has implemented tariffs on EUR 26bn worth of US exports into the EU and the tariffs are scheduled to go live on 13th April.
The US action also includes a wider array of goods that includes steel and aluminium in their content and Reuters has cited 289 downstream products as being hit by the tariffs with a value of USD 150bn. Car, truck, bus and tractor parts is the sector that will be most impacted. Canada and Mexico will be the countries impacted most by the actions. It’s important to note that this action with such a large downstream impact is very different in scale than the tariffs in 2018.
The FX impact, which has been USD negative of course of late, has been muted following comments from President Trump dismissing the risks to the US economy and expressing confidence that there will be no recession. But those words are unlikely to have much lasting impact and uncertainty will remain very high especially into the 2nd April. While we understand the broader dollar performance is being negatively hit by the scale of uncertainty as the US economy shows signs of weakness, we would still have expected CAD and MXN to have been trading at weaker levels. More broadly, the dollar will likely be dictated by evidence on real economic conditions which will likely highlight the negative impact of uncertainty on US companies and households.
The impact in Europe will have been diluted by the potential progress toward a ceasefire in Ukraine. An offer agreed between Ukraine and the US is with Russia and if agreed would result in a 30-day ceasefire, presumably for more meaningful dialogue to take place. However, the energy impact is however limited with modest moves in TTF while crude oil prices are modestly higher after the IEA reduced notably its previously estimate of excess supply of crude this year and next.
