USD: What's new with tariffs – Commerzbank

Source Fxstreet

Monday was relatively quiet in terms of news surrounding US tariff policy, at least when compared to last week. The new deadline has been set, and now it's time to get back to the negotiating table. However, it should be clear that the next two weeks will not be easy. Not only because, as we know, only three more or less deals have been reached in the more than 90 days since Liberation Day. EU Trade Commissioner Maroš Šefčovič also indicated yesterday that there are still major differences in individual positions between the US and the EU. At first glance, this seems to contradict statements made in recent weeks, where it was repeatedly said that the two sides had moved closer together. But this does not have to be a contradiction, Commerzbank's FX analyst Volkmar Baur notes.

USD can react to higher inflation with some weakness

"It should be remembered that such negotiations are binary. Either you reach a 100% agreement or you don't. You can negotiate for a long time and agree on 95% of everything. However, if you cannot resolve the last few differences, then there will be no finalization and the deal will fall through. That is why the US government may well be right when it claims that it is close to reaching an agreement with many countries. At the same time, however, this does not necessarily mean that even a single additional deal will ultimately be finalised."

"Meanwhile, a US deal with India is likely to have become more difficult yesterday. Donald Trump announced yesterday that he intends to impose 100% ‘secondary tariffs’ on Russia in 50 days. This means that all countries that trade with Russia (or only import oil from Russia, it is not yet clear exactly) will be subject to an (additional?) tariff of 100% if they want to export to the US. China and India in particular are known to have increased their imports of Russian oil since Russia's invasion of Ukraine, which is why these tariffs are also directed against them."

"For the US Dollar, however, it is no longer so easy to assess what higher inflation could mean. In normal times, one would certainly assume that this would lead to a tighter monetary policy and therefore support the USD. However, there are now question marks over the Fed's response function, i.e. it is not entirely clear how the Fed would deal with higher inflation. It is therefore quite conceivable that the USD could react to higher inflation with some weakness today, as this would further increase tensions between the government, which is calling for a looser monetary policy, and the central bank."

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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