Tariff Fears Back in Ascendance – Currency Thoughts
Tariff Fears Back in Ascendance
May 6, 2025
If enduring dollar hegemony could be assumed, big shocks like a global tariff war would correlate with an appreciating trend driven by safety-seeking capital flows. However, America’s tariff-centric trade policy represents a revolution away from the whole dynamic of the post-WW2 international monetary system. Contrary to the previous conventional wisdom, the more investors worry about trade, the less confident they become about the dollar. As long as President Trump’s ultimate goal is the elimination of all bilateral U.S. trade deficits, the means for achieving that objective inevitably is likely to involve an intermediate desire for the dollar to become more price competitive.
Trump’s trade rhetoric in recent days has circled back to a more confrontational tone, and today’s March U.S. trade data underscore how far the U.S. trade position is currently from what the president desires. In fact, it would appear that his approach to trade and manufacturing is hampering, not promoting, the solution. The U.S. goods and services trade deficit ballooned to $140.5 billion in March and $394 billion in the first quarter from $250 billion in the last quarter of 2024 and #$05 billion in the initial quarter of last year. Imports in the quarter were 23.3% greater than a year earlier, That was 4.5 times faster than the growth of U.S. exports.
Compared to Monday closing levels in New York, the dollar dropped 1.0% against the euro and 0.7% versus the yen and sterling. America’s main trading rival is China, but in contrast to today’s stock market gains of 1.1% in China and 0.7% in Hong Kong, major U.S. equity indices are down 0.5%. The U.S. stance on trade, which has been rolled out in a way that has maximized investor uncertainty, puts the Federal Reserve in a very difficult position, as it will delay both monetary policy mandates. Inflation will track higher. So will unemployment, while economic growth, which was slightly negative in the first quarter, faces continuing headwinds over the short run. Trump wants the Fed to cut rates at this week’s two-day FOMC meeting that begins today. This wish Fed officials in good conscience cannot grant, not at this time and perhaps not for a while longer. Dollar depreciation encouraged by rhetoric from the president’s advisers then becomes the only near-term remedy to relax monetary conditions.
In other overnight financial market action, the price of Bitcoin slid 0.5%, while oil and gold prices soared by 4.3% and 2.5% thus far. Share prices have fallen 0.8% in Germany but are 0.3% firmer in Italy. Ten-year sovereign debt yields rose a basis point in the U.S. and three basis points each in Germany, Great Britain, France, Italy and Spain.
More April purchasing manager surveys were released.
- Euroland’s composite and service-sector PMI indices printed at 2- 5-month lows of 50.4 and 50.1. These readings reflect renewed stagnancy at the start of the second quarter in the face of soft demand aggravated by tariphobia.
- The French economy has staggered the most, depressed additionally by political uncertainties. France’s composite and service PMIs of 47.8 and 47.3 were at 2-month lows. The German composite and service PMIs of 50.1 and 49.0 were also below March scores, but optimism about Germany’s future has been bolstered by a new government that will pour extra resources into the defense industry and others.
- In the U.K., however, the composite PMI fell three points to a 19-month low of 48.5, and a 17-month long streak of service sector readings above 50 was abruptly ended by a 27-month reading of 49.0.
- A 19-month low in Sweden’s service sector PMI of 48.4 depressed the composite PMI for that economy to a 6-month low of 50.6.
- India continues to experience solid growth. Despite a 2-month low service sector score, which at 58.7 still connotes rapidly positive growth, the composite PMI’s revised figure of 59.7 was its highest in eight months.
- China’s PMI readings fell to a 3-month low composite score of 51.1 and a 7-month low in the services PMI of 50.7.
- Egypt‘s non-oil PMI dropped 0.7 points to a 4-month low of 38.5, while the South African index improved 1.7 points to a 5-month high of 50.0.
- Lebanon‘s private PMI recovered from a 5-month low in March of 47.6 to a 2-month high of 49.0.
- Brazilian PMI scores fell in April to 3-month lows of 49.4 in the composite index and 48.9 for services.
President Trump has complained that the Fed has cut interest rates less often and less much than has Governing Council of the European Central Bank has done. The fact is that inflation in the euro area has fallen more sustainably. A 1.6% monthly drop in the common currency bloc’s producer price index during March was reported today, which trimmed the 12-month increase back to a 2-month low of 1.9% from 3.0% in February.
French industrial production underperformed expectations in March, rising 0.2% on month and falling 0.4% compared to the same month a year earlier.
In a week of many scheduled central bank policy reviews, the Central Bank of Armenia’s refinancing interest rate was today kept unchanged at 6.75%. With inflation imploding from 10.3% in mid-2022 into negative territory from mid-2023 until April 2024, the rate had been sliced by 150 basis points in 2023 and 225 bps in 2024, but there has been just one additional 25-basis point cut so far this year done in February. Inflation had rebounded to a 2-year high of 3.3% this past March and only dipped to 3.2% in April.
The Canadian trade balance posted a second straight deficit in March, this time of C$ 310 million, but the first-quarter experienced a surplus of C$ 1.21 billion, twice as wide as in the first quarter of 2024. Canada’s IVEY-PMI index fell to a 3-month low of 47.9 last month.
copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Armenia, Euroland producer prices, Service sector PMIs, U.S. and Canadian trade balances
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