The United States Dollar is treading water this morning and in mixed territory against its G10 peers following the implementation of reciprocal tariffs overnight.
Overview
Though these levies could be considered punishing, they were very vocally telegraphed and as a result the Buck’s reaction is quite limited. As it’s become clear in the few months since April 2nd, all the levies that were enacted at midnight last night can be overturned or renegotiated at any time, so markets are fairly calm in the face of a hot global trade war that still has potential to upend global commerce as we know it.
Today’s levies stem from the August 1st deadline imposed by the Trump Administration, giving border officials a week to catch up to policies and enact import tariffs that by any measure are considered quite punishing. The US’ effective tariff rate on average has risen as of now to a whopping 15.2%, the highest level since World War Two and a massive increase from last year’s average effective rate of 2.3%. US imports over the last 3 months have already slowed, and that trend is likely to continue through the rest of this year. The Buck, however, is shrugging off today’s headline news and is trading fairly calmly – the enactment of these levies has reduced market uncertainty substantially and this risk event has been priced in for some time. As we’ve written in our monthly and annual outlooks, we expect USD to depreciate more slowly and steadily through the remainder of this calendar year as markets have time to digest the implications of these trade policies to the global macroeconomy.
Geopolitical risk events do remain on the table today, and news reports from the Kremlin suggest that the US and Russia are likely to meet and discuss the Administration’s demand for a ceasefire in the coming days. A potential ceasefire, however, is still likely to be Dollar-negative as investors may move to favor risk-forward assets. With no major releases for the US on the data calendar ahead of next week’s CPI reading, USD trading should continue to be headline-driven.
What to Watch This Week…
- Banxico Interest Rate Decision, Thursday 3PM
- US CPI July, Tuesday 8:30AM
- Monex USA Online is always open
The complete Economic Calendar can be found here.
GBP ⇑
Pound Sterling is outperforming its G10 peers this morning, gaining just north of half a percent against the Buck in early US trading. The Bank of England cut interest rates by 25 basis points this morning but that has not deterred the Pound – traders on overnight interest rate swaps think it’s probably the BoE only has one more 25 point cut coming down the pipe this year. This is in contrast to Fed swaps, which have priced in substantially more easing from the US central bank following Friday’s poor employment data. The BoE’s head Bailey shied away from discussions on neutral and terminal rates, a hawkish signal that’s giving GBP a boost.
MXN ⇑
Ahead of an interest rate from Banxico due out this afternoon, MXN is treading water against USD and trading much stronger on the week to date than at Monday’s open. Though Banxico’s policymakers are widely expected to cut their target interest rate by a quarter percent this afternoon, Mexican economic data has continued to surprise to the upside. Year-over-year core CPI, excluding volatile goods like food and energy, grew 4.23% in the last 12 months. Though this is in line with economists’ expectations, it’s still much higher than all G10 economies. A risk-forward environment is also helping MXN and most emerging-market assets this morning.
