Watch the US Dollar as Trump Eyes Fresh Import Duties

© Nazli Sart, Adobe Stock

Trump is set to announce tariffs on steel and aluminium imports, and the USD could be temporarily supported as a result.

February was a good month for the US Dollar as months of selling pressures finally eased with numerous factors at play behind the recovery; rising inflation, bond yields, global growth dynamics and trade.

It is the latter that forms the focus for the Greenback at the start of March with reports that US President Donald Trump will soon announce a fresh batch of import duties as he continues along a path of aggressive trade protectionism.

Reports suggest Trump is set to announce tariffs on steel and aluminium imports (25% and 10% respectively) as early as today, coinciding with the visit of China’s top economic advisor Liu He.

Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!

— Donald J. Trump (@realDonaldTrump) March 1, 2018

Analysis suggests the magnitude of the tariffs expected to be imposed would be the harshest options presented to the President by the US Commerce Department around two weeks ago. The President asked the Commerce Department to study the impact of steel and aluminium imports on national security with the agency recommending imposing steep curbs on inbound shipments of the two products in question.

The US imports more than 30m tonnes of steel annually with the top ten sources being Canada, Brazil, South Korea, Mexico, Russia, Turkey, Japan, Taiwan, Germany and India.

There is a currency angle to these developments.

"Should these measures be announced, the USD could be temporarily supported, in particular against CAD, MXN and KRW," says Hans Redeker, a foreign exchange analyst with Morgan Stanley.

So far, markets have exhibited few signs of widespread concern around this issue, which we partly attribute to benign responses from affected countries.

Redeker believes China’s reaction is key, as China is the world’s largest producer of steel and aluminium and recently launched their own investigations into imports of US sorghum and soybeans, which are among the largest US exports to China.

"A larger response from China could trigger a sell-off in global risk, temporarily supporting the USD more broadly," says Redeker.

However, Lee Hardman at MUFG looks at the developments from another angle and believes the ongoing shift to a more protectionist US trade policies continues to pose downside risks for the US dollar.

"It has been reported today that President Trump is set to announce steep tariffs on steel and aluminium imports. If confirmed later today, it will likely take away some of the US Dollar’s recent upward momentum and supports our view that the US Dollar should continue to trade with a higher risk premium in the year ahead," says Hardman.

Clearly analysts are divided and this only adds to the difficult analytical environment the Dollar presents; what used to drive the Dollar higher over recent years now apparently sends it lower and there are a multitude of views explaining the moves.

We would say the safest thing to do is note the long-term trend is lower, and the short-term trend is higher; this suggests that ultimately the Dollar will find itself under pressure before long.

"The USD continues to be in a long-term downtrend," says Redeker, who says the natural bias of a reserve currency is to depreciate in a strong macro environment, the likes of which we are witnessing at the present time.

"By definition, a reserve currency must offer liquidity and ample capacity to lend. This may explain why USD corrections during a downtrend tend to be less pronounced compared to during up trends. Since the post-Bretton Woods era began there have been three prolonged USD rallies, all of which took place when global capital demand was weak. USD moves lower when capital demand rises," says Redeker.

At the time of writing the Pound-to-Dollar exchange rate is quoted at 1.3738, the Euro buys 1.2185 Dollars and the Aussie buys 0.7729 Dollars.

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