USD: Trump and his tariffs – Commerzbank

Over the weekend, further letters from the US president arrived at various trading partners, including the EU. According to these letters, imports from the EU will be subject to a 30% tariff from August 1. This is a higher rate than originally announced on Liberation Day. I fear that the market will react to this in a similar relaxed manner to the other, sometimes surprisingly high, threatened tariffs at the end of last week. This morning at least EUR/USD continues to trade below the 1.17 mark, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen reports.

EUR/USD continues trading below the 1.17 mark

"The market reaction is generally attributed to the so-called 'TACO' trade. 'Trump always chickens out,' meaning that Trump always backs down, which has been observed several times since Liberation Day. However, I think that another assumption could play an equally important role: when in doubt, the others cave in. At least, that too has been the case recently. For example, the Canadian government withdrew its digital tax in order to continue negotiations with the US. The Vietnamese government lifted all tariffs on US imports in order to achieve a halving of the originally planned reciprocal tariffs. The EU is also willing to accept a deal with the US government that would favor the US."

"If Trump actually manages to extract significant concessions from US trading partners by threatening them with tariffs, this could be seen as positive for the dollar. This is especially true if the concessions involve trading partners lowering their tariffs on US products. An increase in import tariffs by the US combined with a reduction in tariffs by trading partners would be a positive shock to the US terms of trade. Both measures would lead to an increase in demand for US goods, which would also cause their prices to rise compared to foreign goods. In other words, the measures would lead to a real appreciation of the exchange rate. At least to some extent, this should be reflected in a stronger USD."

"Anyone hoping for planning security in the near future with regard to US tariffs is likely to be bitterly disappointed. Instead, companies must ask themselves whether they can live with the uncertainty of being affected by new US tariffs at any time (i.e. at least for the next three and a half years). This is unlikely to be conducive to US companies' willingness to invest. And that is why I am skeptical about the current strength of the USD."