President Trump’s sweeping tariffs against trading partners have dampened the outlook for U.S. economic growth and raised concerns about inflation. This combination is worrying for investors, who have abandoned a previous belief in U.S. exceptionalism and turned to selling U.S. assets, including the dollar.
“We are at a point when [tariffs pose] the biggest challenge to the dollar-centered, rules-based system that free trade has been based on.” Monex USA senior director of trading Juan Perez said.
The cost of tariffs to the U.S. economy could be severe.
“We are fairly likely to see a pretty hefty growth hit,” Monex USA director of trading Helen Given said.
Businesses are unlikely to absorb the costs, nor will they necessarily bring manufacturing back to the U.S. economy, she said. Instead, it’s likely to be consumers who bear the cost of tariffs, raising the risk that growth is hit while prices rise, a concept known as ‘stagflation’.
If data show more evidence of the tariff impact on the economy, it could drive the dollar lower through the remainder of this year, particularly if the Federal Reserve delivers rate cuts, she said.
The DXY dollar index, which measures the dollar’s value against a basket of currencies, has fallen nearly 10% in the year to date. Last month, it hit a three-year low of 96.377 on fears over the economic implications of Trump’s trade policies. It last trades at 98.072.
“We’ve already seen some of the impact [of tariffs] start to trickle down, primarily in the costs that businesses are passing on.”
Fed Chair Jerome Powell seems “fairly unconvinced” about cutting rates for now, Given said. However, if growth starts to become more of a concern than inflation “we’re definitely going to see the Fed start to ramp up their easing and telegraph a path forward with much lower interest rates than we see now.”
President Trump has repeatedly called for the Fed to cut rates. So far, Powell has resisted those calls and adopted a cautious, wait-and-see stance due to concerns about the risk of higher inflation.
Monex anticipates that rate cuts are on their way. It expects the Fed to reduce rates by 25 basis points twice this year before accelerating policy easing next year.
“I think we’ll see more substantial easing after Powell’s term expires next year,” Given said.
Powell’s term ends in May 2026 and there is speculation that Trump will nominate a replacement that sympathizes with his view that rates should be lowered.
U.S. money markets price an 84% chance that the Fed will resume rate cuts in September, LSEG data show. These bets have been bolstered by weaker-than-expected U.S. nonfarm payrolls data for July, along with remarks from some Fed policymakers calling for imminent rate cuts.
Monex is monitoring is whether tariffs discourage foreign companies from doing business with the U.S.
There could be a gradual shift away from the dollar if it becomes no longer feasible to do business with the U.S., Perez said.
However, if the world continues to follow the current “U.S.-based and U.S.-centered system because it cannot figure out a different way of doing business,” then the dollar could benefit, he said.
Monex USA is the U.S. arm of Monex, a foreign exchange services and global payments group. Monex processes transactions worth more than $63 billion annually.
